<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For The Fifty-Three Week Fiscal Year Ended May 31, 1995
Commission File Number 0-2849
AMERICAN RECREATION CENTERS, INC.
Incorporated in California Federal Employer No. 94-1441151
11171 Sun Center Drive, Suite 120, Rancho Cordova, California 95670
Mailing Address: P. O. Box 580, Rancho Cordova, CA 95741
Registrant's Telephone Number: (916) 852-8005
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
Registrant was $32,536,792 based upon the average trading price quoted on the
NASDAQ system on August 14, 1995. There are no affiliates within the definition
of Rule 405. The number of shares of Registrant's only class of common stock
outstanding at fiscal year end was 5,054,259 shares.
Documents Incorporated by Reference - See pages 2 and 3
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
<TABLE>
<CAPTION>
Part of Form 10-K Document
----------------- --------
<S> <C>
PART I None
PART II
Item 6. Selected Financial Data Company's Annual Report
----------------------- to Shareholders for the
fiscal year ended
May 31, 1995, page 3
Item 7. Management's Discussion and Company's Annual Report
--------------------------- to Shareholders for the
Analysis of Financial Condition fiscal year ended
------------------------------- May 31, 1995, pages 4-5
and Results of Operations
-------------------------
Item 8. Financial Statements and Company's Annual Report
------------------------ to Shareholders for the
Supplementary Data fiscal year ended
------------------ May 31, 1995, pages 6-13,
and Price Waterhouse LLP
Report dated August 4, 1995,
page 14
Item 9. Changes in and Disagreements with Not applicable
---------------------------------
Accountants on Accounting and
-----------------------------
Financial Disclosure
--------------------
PART III
Item 10. Directors and Executive Officers Company's Proxy Statement
-------------------------------- to be filed in connection
of the Registrant with its Annual Meeting
----------------- of Shareholders to be held
September 26, 1995, pages 5-6
Item 11. Executive Compensation Company's Proxy Statement
---------------------- to be filed in connection
with its Annual Meeting
to Shareholders to be held
September 26, 1995, pages 8-15
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Item 12. Security Ownership of Certain Company's Proxy Statement
----------------------------- to be filed in connection
Beneficial Owners and Management with its Annual Meeting
-------------------------------- to Shareholders to be held
September 26, 1995, pages 3-4
Item 13. Certain Relationships and Related Company's Proxy Statement
--------------------------------- to be filed in connection
Transactions with its Annual Meeting
----------- to Shareholders to be held
September 26, 1995, pages 7-8
PART IV
Item 14. Exhibits, Financial Statement Exhibits as specified in
----------------------------- Item 14 of this Report,
Schedules, and Reports on pages 15-16
-------------------------
Form 8-K
--------
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS.
The Company was incorporated in California in 1959. It is engaged principally
in the operation of bowling centers.
(a) GENERAL DEVELOPMENT OF BUSINESS - BOWLING AND RECREATION OPERATIONS. The
Company is one of the largest chain operators of bowling centers in the United
States. As of August 14, 1995 it operates a total of 39 bowling centers
(eighteen in Northern California, three in Southern California, seven in Texas,
six in Wisconsin, three in Oklahoma and one each in Kentucky and Missouri)
containing an aggregate of 1,572 lanes. ARC's bowling centers range in size
from 24 to 72 lanes. Twelve centers are located in buildings that are leased
from third parties; ten centers are located in buildings that are owned by the
Company or its wholly-owned subsidiaries; and seventeen are operated by joint
ventures which own the buildings and in which the Company is an 85% owner.
ARC's bowling centers include food and beverage facilities and coin-operated
video and other games. ARC operates the beverage facilities in all the bowling
centers, each of which sells beer, wine and mixed drinks with the exception of
one center which sells only beer and wine. The Company operates the snack bars
in all centers except three older centers that lease restaurants to independent
operators. Beverage operations are highly profitable. Profits from food
operations are generally minimal; this service is offered primarily for the
convenience of bowling patrons. The bowling division receives a percentage of
the gross revenues from coin-operated video and other games which are owned by
third party vendors or, in the case of the California bowls, by a wholly-owned
subsidiary, ARC Games, Inc. Most centers contain pro shops leased to independent
operators. ARC does, however, operate the pro shops in seven of its centers and
these pro shops generate a modest profit. All of ARC's bowling centers have
child care facilities and parking. The Company provides child care for the
convenience of bowlers free of charge. The Company's bowling centers have
computerized cash receipt control systems to control receipt of funds for all
games bowled as well as computer terminals that communicate with the corporate
office computer system to further enhance these controls.
Approximately 61% of ARC's bowling lineage revenues are derived from bowling
leagues that enter into league reservation agreements to use a specified number
of lanes for a specified time on a weekly, or other periodic basis over the
course of a bowling season. The seasons for league play are generally nine
months in the winter and three months in the summer. However, shorter
"midseason" leagues are also offered throughout the year.
The Company aggressively markets its primary product league bowling, through a
continuous personal sales program at each of its centers. ARC sales personnel
call on employers and a wide variety of nonprofit organizations, such as
churches, social clubs,
4
<PAGE>
civic clubs, P.T.A.'s and fraternal groups, offering them free bowling parties
as an inducement to visit the bowling centers, try league bowling and hopefully
contract for league bowling. In numerous centers, the Company utilizes full-
time direct sales personnel. In addition the Company advertises in all the
recognized mass media--radio, television and newspaper--and engages in on-going
direct mail marketing programs aimed at specific age and demographic groups.
The bowling industry is highly competitive on a local basis. Most of ARC's
centers compete with a number of individually owned and operated centers.
Several of the Company's centers in Southern California, Texas and the Midwest
also compete with centers owned by bowling center chains of equivalent or larger
size. Further competition for ARC's bowling centers could arise if bowling
chains or independent owners construct new bowling facilities in the same areas
as ARC's existing centers. To date, the Company has experienced little
competition for acquisition of independently owned bowling centers, but as the
industry consolidates ARC could experience competition from other chains such as
Brunswick Corporation (approximately 120 centers), AMF (approximately 220
centers), Bowling Corporation of America (approximately 60 centers), and Bowl
America (approximately 25 centers).
The Company has access to bowling equipment from Brunswick Corporation and AMF
Incorporated, several smaller manufacturers and through purchases of used
equipment from other bowling centers. The Company maintains a warehouse of
equipment, including lanes and automatic pinsetters for replacements and to
equip new centers. The restaurant and beverage business also have multiple
sources of supply. The Company has not experienced problems or interruptions as
a result of inadequate supplies of any type.
ARC has approximately 1,400 employees in total. With the exception of 19 people
at the Company's headquarters, the remaining employees are bowling and
recreation operations employees and are based in individual bowling centers.
The Company maintains a variety of training programs and incentive compensation
plans, and believes that relations with its employees are good. The Company has
no organized labor agreements.
Over the past three fiscal years, revenue growth in the Company's bowling
business has been attributable to acquisitions, as fifteen bowling centers were
added. During the same period, revenue in comparable centers declined slightly.
Late in 1995, the Company embarked upon a plan to test the concept of broadening
the Company's operations from one that offers primarily bowling as family
entertainment to one that offers a broader menu of recreational activities, with
bowling being only one of those alternatives. Two test locations are currently
underway and expected to be in operation by the second quarter of 1996.
Ten lanes of a 60-lane center in San Jose, California are being converted to
space that contains children's soft-play, redemption games and branded food
operations. These activities are targeted to families with young children.
Secondly, a 49,000 square foot
5
<PAGE>
family entertainment center in Addison, Texas is under construction. This
facility will feature branded food operations, high tech electronic games
including virtual reality and laser activities, billiards, darts, and other
recreational attractions, all designed to attract young adult customers. Both
concepts are designed to create a broader base of entertainment attractions that
will increase the frequency and revenue per customer per visit. Future
expansion of these concepts will be based on the results of these two tests.
The Company is also engaged on a continuous basis in discussion regarding the
possibility of acquiring additional bowling centers, both within and outside of
its current operating areas. However, the Company is more focused on the
Midwest and Southern states where land and building prices tend to be more
favorable and regional economies tend to be stronger. A majority of the over
7,000 bowling centers in the United States are independently owned and the
Company believes that many of these independent owners and operators may now
have an interest in selling their centers. The Company's strategy is to acquire
centers when it believes that a center's operations can be improved by
instituting professional management, staff training and controls, by aggressive
marketing, facilities remodeling and updating, and by introduction of the family
entertainment concept.
Information regarding the Company's significant acquisitions and dispositions is
set forth in Part II, Item 8, through incorporation by reference to the 1995
Annual Report to Shareholders, Note 3 to financial statements.
GENERAL DEVELOPMENT OF BUSINESS - DIRECT MARKETING. Prior to the first quarter
of fiscal 1996, the Company operated in two business segments: bowling and
direct marketing. On August 4, 1995, the Company sold its 62.5 percent interest
in The Right Start, Inc., a catalog company and retailer of infants' and
children's products that comprised the operations of the direct marketing
segment. The sale price for the 3,937,000 shares was $11,811,000 cash plus an
option to repurchase 400,000 shares of Right Start's common stock at an exercise
price ranging from $3.30 to $6.00 over a seven year period.
Information regarding the Company's sale of its interest in The Right Start,
Inc. is set forth in Part II, Item 8, through incorporation by reference to the
1995 Annual Report to Shareholders, Note 2 to the financial statements.
(b) Not applicable to Registrant.
(c) NARRATIVE DESCRIPTION OF BUSINESS. Included in (a) above.
(d) Not applicable to Registrant
ITEM 2. PROPERTIES.
Facilities. The following table on pages 8 through 11 sets forth the name and
address of
6
<PAGE>
each bowling center, the number of lanes that it contains and whether the
building in which the center is located is leased or owned. With one exception,
the Company owns all of the equipment at each center. Leases on the centers,
giving the effect of option renewal periods, expire as follows: one in 1999;
six from 2000 through 2009; five from 2010 through 2019; and one from 2020
through 2029. The leases provide for minimum and percentage rentals and, in a
majority of cases, for the payment of property taxes and insurance by the
lessee. With a single exception, the Company's leases with unaffiliated parties
do not provide for cost of living adjustments in the lease payments.
7
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
SAN FRANCISCO BAY AREA
Mel's Southshore Bowl 40 Owned
300 Park Street
Alameda, California
Mission Lanes 40 Owned
1287 South Park Victoria
Milpitas, California
Pinole Valley Lanes 40 Leased
1580 Pinole Valley Road
Pinole, California
19th Avenue Bowl 32 Leased
1830 South Delaware
San Mateo, California
Mowry Lanes 40 Owned
585 Mowry Avenue
Fremont, California
Mel's Redwood Bowl 40 Owned(2)
2580 El Camino Real
Redwood City, California
Valle Vista Bowl 42 Leased
3345 Sonoma Boulevard
Vallejo, California
SAN JOSE
Oakridge Lanes 60 Leased
5420 Thornwood Drive
San Jose, California
Fiesta Lanes 40 Leased
1523 West San Carlos
San Jose, California
Saratoga Lanes 32 Leased
1585 Saratoga Avenue
San Jose, California
SACRAMENTO/SAN JOAQUIN VALLEY
Mardi Gras Lanes 50 Leased
4800 Madison Avenue
Sacramento, California
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
Alpine Valley Bowl 40 Owned
2326 Florin Road
Sacramento, California
Birdcage Bowl 40 Leased
6149 Sunrise Boulevard
Citrus Heights, California
Rocklin Bowl 40 Owned
2325 Sierra Meadow Drive
Rocklin, California
Land Park Bowl 32 Owned
5850 Freeport Boulevard
Sacramento, California
Visalia Lanes 40 Owned
1740 West Caldwell Avenue
Visalia, California
Rodeo Lanes 40 Leased
140 Shaw Avenue
Clovis, California
Sunnyside Lanes 36 Leased
5693 East Kings Canyon Road
Fresno, California
SOUTHERN CALIFORNIA
Cerritos Lanes 40 Leased
18811 Carmenita Road
Cerritos, California
Friendly Hills Lanes 32 Owned
15545 East Whittier Boulevard
Whittier, California
Forest Lanes 40 Leased
22771 Centre Drive
Lake Forest, California
DALLAS, TEXAS
Triangle Bowl - Lewisville 32 Owned(1)
1398 West Main Street
Lewisville, Texas
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
Triangle Bowl - Richardson 40 Owned(1)
2101 North Central Expressway
Richardson, Texas
Triangle Bowl - Irving 48 Owned(1)
1717 North Beltline Road
Irving, Texas
Triangle Bowl - Desoto 40 Owned(1)
121 Northgate Drive
Desoto, Texas
Triangle Bowl - Arlington 48 Owned(1)
1801 East Lamar Boulevard
Arlington, Texas
Triangle Bowl - Midland Park 32 Owned
5320 West Loop 250 North
Midland, Texas
HOUSTON, TEXAS
Triangle Bowl -Houston 28 Owned(1)
650 West Crosstimbers
Houston, Texas
OWENSBORO, KENTUCKY
Bowlodrome 24 Owned(1)
600 East 14th Street
Owensboro, Kentucky
OKLAHOMA
Sunny Lanes 24 Owned(1)
4330 South East 15th Street
Del City, Oklahoma
Windsor Lanes 40 Owned(1)
4600 North West 23rd Street
Oklahoma City, Oklahoma
Moore Bowl 40 Owned(1)
420 South West 6th Street
Moore, Oklahoma
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Number Status of
Name and Address of Lanes Property
<S> <C> <C>
KANSAS CITY, MISSOURI
Capital Lanes 24 Owned(1)
11611 Hickman Mill Road
Kansas City, Missouri
MILWAUKEE, WISCONSIN
Bowlero Bowl 72 Owned(1)
11737 West Burleigh
Wauwatosa, Wisconsin
West Allis Bowl 48 Owned(1)
10901 West Lapham
West Allis, Wisconsin
West Bowl 48 Owned(1)
7505 West Oklahoma
Milwaukee, Wisconsin
South Park Bowl 40 Owned(1)
305 North Chicago
South Milwaukee, Wisconsin
Waukesha Bowl 48 Owned(1)
901 Northview Road
Waukesha, Wisconsin
Regency Lanes 60 Owned(1)
6014 North 76th Street
Milwaukee, Wisconsin
</TABLE>
(1) Owned by joint ventures in which the Company has an 85 percent interest.
(2) Building is owned, land is leased.
11
<PAGE>
REAL ESTATE
The following table sets forth certain information about the real estate owned
or partially owned by the Company or in partnership with others as of August 14,
1995.
<TABLE>
<CAPTION>
COMPANY OWNED REAL ESTATE
FISCAL
SIZE OF LAND BUILDING IN % OWNED YEAR
BOWLING PROPERTIES LOCATION IN ACRES SQUARE FEET BY ARC ACQUIRED CURRENT USE
----------------------------- ---------------- ------------ ----------- ------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Mowry Lanes Fremont, CA 2.30 35,000 100 1987 Bowling Center
Land Park Bowl Sacramento, CA 2.53 30,000 100 1987 Bowling Center
Mel's Southshore Bowl Alameda, CA 2.10 40,000 100 1986 Bowling Center
Lucky Lanes San Pablo, CA 3.40 61,000 100 1984 Bowling Center
Alpine Valley Lanes Sacramento, CA 4.00 40,000 100 1985 Bowling Center
Rocklin Bowl Rocklin, CA 2.85 36,000 100 1986 Bowling Center
Visalia Lanes Visalia, CA 3.00 33,000 100 1983 Bowling Center
Mission Lanes Milpitas, CA 3.07 33,000 100 1978 Bowling Center
Friendly Hills Lanes Whittier, CA 2.75 34,000 100 1972 Bowling Center
Mel's Redwood Bowl Redwood City, CA 0.00 40,000 100 1993 Bowling Center
Triangle Bowl - Houston Houston, TX 2.33 28,000 85(5) 1982 Bowling Center
Triangle Bowl - Lewisville (2) Lewisville, TX 2.80 30,000 85(5) 1986 Bowling Center
Triangle Bowl - Richardson Richardson, TX 3.22 38,000 85(5) 1988 Bowling Center
Triangle Bowl - Irving Irving, TX 4.04 60,000 85(5) 1988 Bowling Center
Triangle Bowl - Desoto Desoto, TX 4.00 38,000 85(5) 1991 Bowling Center
Triangle Bowl - Arlington Arlington, TX 4.28 44,000 85(5) 1993 Bowling Center
Triangle Bowl - Midland Midland, TX 4.21 38,000 100 1995 Bowling Center
Fun Fest Addison, TX 4.29 85(5) 1995 Construction in progress
Bowlodrome Owensboro, KY 0.83 24,000 85(6) 1993 Bowling Center
Capital Lanes Kansas City, MO 4.00 26,000 100 1994 Bowling Center
Sunny Lanes Del City, OK 3.50 22,000 85(6) 1993 Bowling Center
Windsor Lanes Oklahoma City, OK 4.14 40,000 85(6) 1994 Bowling Center
Moore Bowl Moore, OK 3.00 38,000 85(6) 1994 Bowling Center
Bowlero Bowl Wauwatosa, WI 9.00 71,000 85(6) 1995 Bowling Center
West Allis Bowl West Allis, WI 4.00 45,000 85(6) 1995 Bowling Center
West Bowl Milwaukee, WI 1.00 41,500 85(6) 1995 Bowling Center
South Park Bowl S. Milwaukee, WI 4.00 40,000 85(6) 1995 Bowling Center
Waukesha Bowl Waukesha, WI 5.00 50,000 85(6) 1995 Bowling Center
Regency Lanes Milwaukee, WI 6.25 90,000 85(6) 1995 Bowling Center
----- ---------
Total Bowling 99.89 1,145,500
----- ---------
NON-BOWL REAL ESTATE
--------------------
Visalia (Land - Retail site) Visalia, CA 1.34 100 1983 Vacant lot
Rocklin (Land - Retail site) Rocklin, CA 2.30 87.5(4) 1982 Vacant lot
Union Square Lanes (1) Union City, CA 3.00 33,000 70 (3) 1987 Closed bowling center
Union City (Commercial) (1) Union City, CA 3.00 40,000 70 (3) 1978 Automotive center
Livermore (Warehouse) Livermore, CA 1.00 20,000 50 (3) 1979 Current warehouse
Madison Avenue (Office) Sacramento, CA 0.00 6,000 100 1987 Office building
Raley Boulevard (Land -
Warehouse site) Sacramento, CA 3.57 100 1985 Vacant lot
Broadway Grand (Land -
Office site) Oakland, CA 1.13 60(3) 1978 Parking lot
Commercial - Restaurant (2) Lewisville, TX 0.68 4,000 100 1986 Restaurant
Sun Center (Office) (7) Rancho Cordova, CA 2.40 37,000 100 1990 Office building
----- ---------
Total Non-Bowling 18.42 140,000
----- ---------
</TABLE>
1. These properties are on adjoining parcels of land in Union City, CA.
2. These properties are on adjoining parcels of land in Lewisville, TX.
3. Partnership with Bernal Investments, Inc., a Northern California real
estate contractor and not an affiliate with the Company.
4. Partnership with Fong, Eatough and Borges, a Northern California
architecture and planning firm and not an affiliate with the Company.
5. Joint Venture with Neil Hupfauer.
6. Joint Venture with William Kratzenberg.
7. The Company's headquarters occupies approximately 20% of the rentable
office space. The rest is leased or available for lease to tenants.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Registrant is normally engaged in a number of cases of ordinary and routine
litigation incidental to its business, substantially all of which actions
involve personal injuries, minor wage disputes, or workers' compensation claims,
and occasional landlord-tenant disputes. Substantially all of the claims under
such routine litigation are covered by insurance or adequate reserves, and most
such cases are being defended by an insurance carrier at no direct cost to
Registrant.
Registrant is not engaged in any significant litigation, nor is it aware of any
significant claims or threatened litigation as of August 14, 1995.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS.
(a), (b) and (c) - On August 14, 1995 the average price for a share of the
Registrant's Common Stock was $6.44. At August 14, 1995, there were
approximately 4,700 holders of record of the Registrant's Common Stock.
The following table sets forth (i) the quarterly range of high and low bid
prices per share of the Registrant's Common Stock in the over-the-counter
market, as reported by NASDAQ (National Association of Securities Dealers'
Automated Quotation System), and (ii) the quarterly cash dividends per share
declared by the Registrant on its Common Stock.
<TABLE>
<CAPTION>
Cash
Fiscal Quarters: High Low Dividends
------------------- ------ ------ ---------
<S> <C> <C> <C>
1995:
First Quarter $ 7.00 $6.375 $ .060
Second Quarter $ 7.00 $5.875 $ .060
Third Quarter $ 6.50 $ 4.50 $ .060
Fourth Quarter $7.625 $6.125 $.0625
1994:
First Quarter $ 7.75 $ 6.00 $ .055
Second Quarter $ 7.75 $ 5.75 $ .055
Third Quarter $ 6.50 $5.625 $ .055
Fourth Quarter $ 7.00 $6.125 $ .060
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to 1995 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference to 1995 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements together with the report thereon of Price Waterhouse
dated August 4, 1995, appearing in the American Recreation Centers, Inc. 1995
Annual Report to Shareholders are incorporated by reference in this Form 10-K
Annual Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to Definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to Definitive Proxy Statement.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements of the Company as set forth under Item 8 of this report
on Form 10-K are incorporated herein by reference to the following pages of the
1995 Annual Report to Shareholders:
<TABLE>
<CAPTION>
Page in
Annual
Report**
--------
<S> <C>
Report of Independent Accountants 14
Consolidated Balance Sheet at
May 31, 1995 and May 25, 1994 6
Consolidated Statement of Income
and Retained Earnings for the
three years ended May 31, 1995 7
Consolidated Statement of Cash Flows
for the three years ended May 31, 1995 8
Notes to Consolidated Financial Statements 9-13
(a)(2) Financial Statement Schedules
Report of Independent Accountants
on Financial Statement Schedule
for the three years ended May 31, 1995 18
II -- Valuation Reserves 19
</TABLE>
(a)(3) Financial Statements of the American Recreations Centers, Inc. Employee
Stock Ownership Plan for the year ended May 31, 1995 to be filed by
amendment.
** Incorporated by reference from the indicated pages of the 1995 Annual Report
to Shareholders.
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
15
<PAGE>
(a)(4) Listing of Exhibits
The following exhibits of the Company are included or incorporated herein.
(Note: The numbers preceding the exhibits correspond to the specific number
within Item 601 of Regulation S-K.)
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.1 Contract for investment banking services between the Company
and Allen & Company Incorporated, dated March 30, 1995.
10.2 Executive Severance Agreement between the Company and Robert
A. Crist, dated April 1, 1995.
10.3 Executive Severance Agreement between the Company and Karen
B. Wagner, dated April 1, 1995.
10.4 Executive Severance Agreement between the Company and Susan
K. Cook, dated April 1, 1995.
13.1 Annual Report to Shareholders for fiscal year ended May 31,
1995.
13.2 Proxy statement to be filed in connection with the Annual
Shareholders Meeting on September 26, 1995.
27.1 Financial Data Schedule
</TABLE>
(b) There were no reports on Form 8-K filed during the fiscal year ended May
31, 1995. A Form 8-K dated August 4, 1995 is being filed concurrent
herewith.
(c) Not applicable.
(d) Not applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirement of Sections 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN RECREATION CENTERS, INC.
(Registrant)
Dated: August 17, 1995 Robert A. Crist
-----------------------------------
Robert A. Crist, President and
Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Robert A. Crist August 17, 1995
-----------------------------------
Robert A. Crist, Principal
Executive Officer and Director,
President
Karen B. Wagner August 17, 1995
-----------------------------------
Karen B. Wagner, Principal
Financial and Accounting Officer,
Vice President/Treasurer
Robert Feuchter August 17, 1995
-----------------------------------
Robert Feuchter, Chairman of the
Board of Directors
G. Gervaise Davis III August 17, 1995
-----------------------------------
G. Gervaise Davis III, Vice
President/Legal and Secretary
Stephen R. Chanecka August 17, 1995
-----------------------------------
Stephen R. Chanecka, Director
17
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of American Recreation Centers, Inc.
Our audits of the consolidated financial statements referred to in our report
dated August 4, 1995 appearing in the 1995 Annual Report to Shareholders of
American Recreation Centers, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statements Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
--------------------
Sacramento, California
August 4, 1995
18
<PAGE>
SCHEDULE II
AMERICAN RECREATION CENTERS, INC.
AND CONSOLIDATED SUBSIDIARIES
VALUATION RESERVES
<TABLE>
<CAPTION>
Additions charged to
------------------------------------------
Balance at Balance at
beginning Costs and Other end
of period expenses accounts Deductions of period
---------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fifty-three weeks ended:
------------------------
May 31, 1995
------------
Allowance for doubtful accounts 96,000 (80,000) 16,000
========= ======= ======= ========== =========
Property held for sale 3,077,000 (3,077,000) 0
========= ======= ======= ========== =========
Fifty-two weeks ended:
----------------------
May 25, 1994
------------
Allowance for doubtful accounts 101,000 (5,000) 96,000
========= ======= ======= ========== =========
Property held for sale 5,644,000 397,000 (2,964,000) 3,077,000
========= ======= ======= ========== =========
Fifty-two weeks ended:
----------------------
May 26, 1993
------------
Allowance for doubtful accounts 10,000 91,000 101,000
========= ======= ======= ========== =========
Property held for sale 5,124,000 296,000 224,000 5,644,000
========= ======= ======= ========== =========
</TABLE>
19
<PAGE>
[LETTERHEAD OF ALLEN & COMPANY INCORPORATED]
March 30, 1995
American Recreation Centers, Inc.
11171 Sun Center Drive
Suite 120
Rancho Cordova, CA 95670
Attn: Mr. Robert Feuchter
Chairman of the Board
Dear Mr. Feuchter:
We are pleased to confirm our mutual understanding concerning the retention
by American Recreation Centers, Inc. (collectively with its subsidiaries and
affiliates, the "Company") of Allen & Company Incorporated ("Allen") to act as
the Company's exclusive financial advisor to assist it in reviewing certain
transaction opportunities available to the Company and in exploring other
alternatives to achieve the greatest long-term value to the Company's
stockholders.
1. Scope of Engagement. In connection with its engagement hereunder,
Allen will review the current operations and financial condition of the Company
and evaluate its business prospects. On the basis of such information, Allen
will assist the Company and its Board of Directors in evaluating all reasonable
alternatives available to the Company to achieve the greatest long-term value to
the Company's stockholders, including, but not limited to, an evaluation of the
offer made by Fulcrum Capital Partners to acquire the Company, the possibility
of selling the Company's entire interest in The Right Start, Inc., possible
joint ventures with third parties, the possibility of a recapitalization and any
other possibilities suggested by Allen and the Board of Directors of the
Company.
If the Company determines to seek the assistance of a financial
advisor (a) in connection with the offer or sale of the stock or assets of the
Company or any of its significant subsidiaries, or other transactions consistent
with the objective of maximizing value, or (b) to render an opinion as to the
fairness to the Company, any significant subsidiary or their respective
stockholders, of any such transaction or alternative, then Allen shall have the
right to act in such capacity. If so engaged, Allen will advise the Company in
connection with its preparation of
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 2
appropriate offering materials, to the extent required, and will identify and
screen potential buyers or investors and assist the Company in evaluating any
offers or proposals it receives. Allen will also assist the Company in
structuring and negotiating, and will otherwise assist in taking necessary steps
toward consummating, any proposed transaction.
If requested by the Board of Directors of the Company in connection
with any transaction, we will render an opinion (an "Opinion") as to the
fairness to the Company or its stockholders, from a financial point of view,
of the consideration to be received pursuant to the transaction, and will
furnish to the Company a letter expressing such Opinion for inclusion in
material that may be provided to stockholders of the Company and/or filed with
the Securities and Exchange Commission. Any Opinion shall be in such customary
form and with such qualifications as determined appropriate by Allen.
The Company understands that Allen has in the past provided financial
advisory services to The Right Start Inc., a 62.5% owned significant subsidiary
of the Company ("Right Start"), and that until very recently, John Simon, a
managing director of Allen, was a director of Right Start. Allen also owns
approximately 148,000 shares of Right Start common stock and warrants to
purchase 129,200 additional shares at an exercise price of $7.19 per share. The
Board of Directors of Right Start has advised Allen that under the
circumstances, and because of Allen's familiarity with the two companies, it
believes that the engagement of Allen by the Company is in Right Start's best
interest. To accommodate such engagement, the members of the Board of Directors
of Right Start have concluded that Mr. Simon should resign from the Board of
Right Start, which Mr. Simon has done as of the date hereof. The Company
understands that there may exist conflicts by reason of Allen's prior
relationships with Right Start, but hereby waives such conflict and wishes to
proceed with this engagement.
2. Advisory Fees and Expenses. In consideration for Allen's services,
the Company shall pay to Allen, upon the signing of this letter, an initial fee
of $l00,000. The payment of the initial fee shall include the services provided
by Allen to the Company as set out in the first subparagraph under paragraph 1,
Scope of Engagement, above. In addition, if the Company, subsequent to the
discussions, analysis and evaluation as described in the first subparagraph
under paragraph 1, requests Allen to assist in the offer or sale of the stock or
assets of the Company or any of its significant subsidiaries, or other
transactions with the objective of maximizing value, including substantial
corporate acquisitions or dispositions (a "Company Request"), the Company shall
pay to Allen, an additional fee of $200,000. The foregoing fees shall be non-
refundable, but creditable against other fees owed by the Company to Allen
pursuant to this paragraph 2, including the $300,000 or 1% provided in the
following subparagraph.
If a Company Request is made, the Company shall pay to Allen upon the
consummation of any Transaction (as defined below), a cash fee equal to 2% of
any and all
<PAGE>
American Recreation Centers, Inc.
March 20, 1995
Page 3
Consideration (as defined below) received in connection with such Transaction;
provided, however, the fee payable by the Company to Allen shall be (a)
increased to 2.25% of any and all Consideration received, if the Consideration
received in connection with a Transaction involving the Company is the
equivalent of greater than $8.50 per share of the Company's common stock or the
Consideration received in connection with a Transaction involving Right Start
is the equivalent of greater than $3.00 per share of Right Start common stock
and (b) increased to 2.5% of any and all Consideration received, if the
Consideration received in connection with a Transaction involving the Company is
the equivalent of $10.00 or more per share of the Company's common stock or the
Consideration received in connection with a Transaction involving Right Start is
the equivalent of $3.60 or more per share of Right Start common stock. If a
Company Request does not occur, the Company shall pay to Allen, upon the
consummation of any Transaction, a cash fee equal to 1% of any and all
Consideration received in connection therewith; provided, however, if Allen is
asked to provide a fairness opinion in connection with any Transaction; the fee
payable to Allen shall be the greater of $300,000 or 1% of any and all
Consideration received. To the extent the right to receive any Consideration is
contingent upon future events after the closing, the fee with respect to that
portion of the Consideration shall be payable if and when the right to receive
such Consideration becomes fixed.
The Company's objective is to achieve the optimal realization of value
on its stockholders' investment in the Company, regardless of the form any
transaction may take. Therefore, as used herein, the term "Transaction" shall
include (a) any sale or transfer, or series of sales or transfers (by contract,
tender offer or otherwise), of the voting stock of the Company or any of its
significant subsidiaries, which in the aggregate represents the sale or transfer
of greater than 50% of the voting stock of the Company or any such subsidiary
outstanding as of the date hereof, (b) any merger, consolidation or other
business combination involving the Company or any of its significant
subsidiaries, which has the effect of changing or transferring, directly or
indirectly, voting control of the Company or any such subsidiary, (c) any sale
or other disposition of all or a substantial portion of the businesses or assets
of the Company or any of its significant subsidiaries, or (d) any
reorganization, recapitalization or other transaction which has the effect of
changing or transferring, directly or indirectly, voting control of the Company
or any of its significant subsidiaries. For the purpose of determining any fees
payable pursuant to the preceding paragraph, "Consideration" shall mean (i) any
cash, and the fair market value of any securities or other property, paid or
payable to, or inuring to the benefit of, the Company or any of its
securityholders or affiliates (including payments to the Company's management
beyond amounts reasonably related to compensation for services performed, other
than payments pursuant to existing agreements) at the time of the consummation
of the relevant Transaction or committed to be so paid in the future, (ii) in
the case of a Transaction in the nature of a sale of assets, the current
aggregate dollar amount of all liabilities of the Company or any of its
securityholders or affiliates assumed, or to be assumed, other than liabilities
incurred in the ordinary course of business or related solely to such assets
prior to such Transaction, (iii) the
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 4
amount of cash or the fair market value of any property invested at the closing
of the relevant Transaction, or committed to be invested in the future, in the
Company or any successor to any of its businesses and (iv) any contingent
amounts referred to in (i), (ii) or (iii) above at the time the same are paid,
assumed or invested. Notwithstanding the foregoing, if the Transaction takes the
form of a merger or consolidation or an exchange or purchase of securities (in a
tender offer or otherwise), in which the holders of the Company's equity
securities generally are entitled to receive cash or other securities in
exchange for their securities of the Company, then "Consideration" shall mean
the product of the fair market value of the cash, securities or other property
received in exchange for each such equity security times the total number of
equity securities of the Company outstanding immediately prior to the
Transaction (with appropriate adjustments made for the exercise price of any
"in-the-money" options or warrants then outstanding).
If a transaction, other than a Transaction which conforms with the
definition thereof in the immediately preceding paragraph, involving the Company
or any of its securityholders or affiliates is consummated, and such transaction
(a) is directly related to the assignment of Allen as described in paragraph 1
hereof and (b) is of such a size that a financial advisor or investment banker
would typically be involved, the Company and Allen shall mutually agree in good
faith upon a fee to be paid to Allen which will appropriately compensate Allen
for the nature and extent of Allen's efforts on the Company's behalf and fees
customarily paid to investment bankers for similar transactions.
No fee payable to any other financial advisor, by the Company or any
other person or entity in connection with the subject matter of this engagement,
shall reduce or otherwise affect any fee payable hereunder.
In addition to any fees described above, whether or not any
transaction is consummated, the Company shall reimburse Allen, upon request from
time to time, for the reasonable out-of-pocket expenses incurred pursuant to our
engagement hereunder, including the reasonable fees and disbursements of our
counsel, as well as any other consultants and advisors retained by us with your
consent.
3. Term and Termination. The initial term of this engagement shall be
for a period of six months from the date hereof and may be extended as the
parties shall mutually agree, subject to the establishment of arrangements for
additional compensation and other appropriate terms for such extension.
Notwithstanding the foregoing, this engagement, or any extension hereof, may be
terminated by you or us at any time upon written notice, without liability or
continuing obligation for either party, except as provided below in this
paragraph 3.
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 5
Notwithstanding termination of this engagement or completion of any
assignment hereunder, however, Allen shall be entitled to the payment of a fee
for any transaction as established pursuant to paragraph 2 hereof, whether or
not such transaction relates to an entity introduced or identified by Allen, if
such transaction is consummated, or if any agreement or arrangement respecting
such transaction is made, prior to the expiration of the term hereof. Allen
shall also be entitled to the payment of such fee if after the date of
expiration or termination, but prior to the second anniversary hereof, the
Company or any of its securityholders or affiliates consummates a transaction
with any entity identified by or introduced to the Company through Allen or with
which Allen had contact on behalf of the Company; provided that such entity (or
the affiliate of such entity through which the relevant introduction or contact
was made) is identified in a written communication to the Company on or prior to
such date.
Any termination of this engagement pursuant to this paragraph 3 shall
otherwise be without liability or continuing obligation for either party, except
for fees or other compensation earned or expenses incurred by Allen up to the
date of termination, or fees which may be earned after such date as provided
above. Furthermore, the provisions of paragraph 6 hereof relating to
indemnification and contribution shall remain operative and in full force and
effect, notwithstanding the termination of this engagement or the completion of
any or all assignments hereunder.
4. Public Announcements. Prior to any press release or other public
disclosure relating to our services hereunder, the Company and Allen shall
confer and reach an agreement upon the contents of any such disclosure.
Notwithstanding the foregoing, except as required by any applicable law, rule
or regulation, no party shall make any public announcement regarding this
engagement or our relationship with the Company thereunder without the prior
consent of the other party.
5. Responsibility for Disclosure. The Company shall provide Allen all
information material to its business and operations as well as any other
relevant information which Allen reasonably requests in connection with the
performance of its services hereunder. The Company represents and warrants to
Allen that all such information, and all information released to the public or
filed by the Company with any relevant government agency or regulatory body,
will be accurate and complete at the time it is furnished or fled, and the
Company agrees to keep Allen advised of all material developments affecting the
Company through the later of the term of our engagement or completion of any
transaction in which Allen is involved. The Company understands that Allen will,
in coordination with the Company, be providing such information to prospective
purchasers or investors and other appropriate parties, but that Allen shall not
in any respect be responsible for the accuracy or completeness of such
information. In addition, the Company acknowledges that, in rendering its
services hereunder, Allen will be using and relying on information provided by
the Company and the other parties to any proposed transaction, as
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 6
well as information available from public sources and other sources deemed
reliable by Allen, without independent verification by Allen. Allen does not
assume responsibility for the accuracy or completeness of any such information.
6. Indemnification and Contribution. The Company agrees that in the
event Allen or any of Allen's officers, employees, agents, affiliates or
controlling persons, if any (each of the foregoing, including Allen, an
"Indemnified Person"), become involved in any capacity (whether or not as a
party) in any action, claim, proceeding or investigation (including any security
holder action or claim or any action brought by or in the right of the Company)
related to or arising out of our engagement, including any related services
already performed and any modifications or future additions to such engagement,
the Company will promptly reimburse each such Indemnified Person for its legal
and other expenses (including the cost of any investigation and preparation) as
and when they are incurred in connection therewith.
In addition, the Company will indemnify and hold harmless each
Indemnified Person from and against, and no Indemnified Person shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company or its security holders or creditors for, any losses, claims, damages,
liabilities or expenses related to or arising out of our engagement, any
services provided thereunder or any transactions or proposed transactions
related thereto, including any related services already performed and any
modifications or future additions to such engagement, whether or not any pending
or threatened action, claim, proceeding or investigation giving rise to such
losses, claims, damages, liabilities or expenses is initiated or brought by or
on behalf of the Company and whether or not in connection with any action,
claim, proceeding or investigation in which the Company or any Indemnified
Person is a party, except to the extent that any such loss, claim, damage,
liability or expense is found by a court of competent jurisdiction in a judgment
that has become final in that it is no longer subject to appeal or review to
have resulted directly and primarily from such Indemnified Person's bad faith or
gross negligence.
If for any reason the foregoing indemnification is held unenforceable,
then the Company shall contribute to the loss, claim, damage, liability or
expense for which such indemnification is held unenforceable in such proportion
as is appropriate to reflect the relative benefits received, or sought to be
received, by the Company and its security holders on the one hand and the party
entitled to contribution on the other hand in the matters contemplated by this
engagement, as well as the relative fault of the Company and such party with
respect to such loss, claim, damage, liability or expense and any other relevant
equitable considerations. The Company agrees that, to the extent permitted by
applicable law, in no event shall the Indemnified Persons be responsible for or
be required to contribute amounts which in the aggregate exceed the fees
actually paid to Allen for such financial advisory services.
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 7
The Company's reimbursement, indemnity and contribution obligations
under this letter shall be in addition to any liability which the Company may
otherwise have and shall not be limited by any rights Allen or any other
Indemnified Person may otherwise have. The Company agrees that, without Allen's
prior written consent, which will not be unreasonably withheld, the Company will
not settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action, proceeding or investigation in respect of which
indemnification or contribution could be sought hereunder (whether or not Allen
or any other Indemnified Person is an actual or potential party to such claim,
action, proceeding or investigation), unless such settlement, compromise or
consent includes an unconditional release of each Indemnified Person from all
liability arising out of such claim, action, proceeding or investigation.
The Indemnified Person shall notify the Company of the commencement of
any action for which it seeks indemnification hereunder if the Company is not a
party to such action, but the failure so to notify the Company will not relieve
the Company from liability hereunder unless and to the extent the Company did
not otherwise learn of such action and such failure results in the loss by the
Company of substantial rights or defenses.
The provisions of this paragraph 6 shall remain in effect
indefinitely, notwithstanding the completion of this assignment, the
expiration of the term hereof or any other termination of this engagement.
7. Miscellaneous. No waiver, amendment or other modification of this
agreement shall be effective unless in writing and signed by each party to be
bound hereby. This agreement, and any claim related directly or indirectly to
this agreement, shall be governed by, and construed in accordance with, the laws
of the State of California applicable to agreements executed and to be fully
performed therein. No such claim shall be commenced, prosecuted or continued in
any court other than the courts of the State of New York located in the City and
County of New York or in the United States District Court for the Southern
District of New York. Allen and the Company (on the Company's own behalf and to
the extent permitted by applicable law, on behalf of its stockholders and
creditors) waive all right to trial by jury in any action, proceeding or
counterclaim (whether based upon contract, tort or otherwise) related to or
arising out of our engagement. The obligations of this agreement shall be
binding upon and shall inure to the benefit of the parties hereto, the
Indemnified Persons hereunder and any of their successors, assigns, heirs and
personal representatives.
<PAGE>
American Recreation Centers, Inc.
March 30, 1995
Page 8
Please confirm that the foregoing is in accordance with your understanding
of the terms of our engagement by signing and returning to us the enclosed
duplicate of this letter, which shall thereupon constitute a binding agreement
between us.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ JOHN SIMON
--------------------------------
John Simon
Managing Director
Accepted and agreed to
as of the date first above written:
AMERICAN RECREATION CENTERS, INC.
By: /s/ ROBERT FEUCHTER
-----------------------------------
Robert Feuchter
Chairman of the Board
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is between AMERICAN RECREATION CENTERS, INC., a
California corporation, and ROBERT A. CRIST, an individual, respectively
referred to as "ARC" and "Crist." It shall be effective as of April 1, 1995,
irrespective of the actual date on which it is signed by the parties.
RECITALS OF FACT:
A. Crist has served ARC as an officer and employee for more than ten
years, during which his efforts and loyalty to ARC have resulted in significant
benefits to the shareholder owners of ARC, the employees of ARC, and its
many customers throughout the country. He is currently serving as CEO and
President of ARC, and is a Director of the company. He presently serves without
any written employment agreement.
B. The Board of Directors of ARC (acting without the presence of
Crist) is concerned that, because of currently pending third party efforts to
take over control of ARC, Crist may be placed in a conflict between his loyalty
and duties to the shareholders of ARC and his own economic interests. To avoid
this pressure on him and to keep his focus on the best interests of the
shareholders in case of any change of control or recapitalization of the
company, the Board, acting on a recommendation from its Compensation Committee,
desires to provide a means by which Crist will be protected from the
consequences of unfair termination or reduction in his authority and duties at
the company by reason of change of control of ARC.
C. The Board believes it is in the best interests of ARC's
shareholders to have in place a written agreement that will pay Crist a
significant, but fair, sum of termination compensation in the event of change of
control, as defined in this agreement. It, therefore, voted unanimously, Crist
abstaining, on April 6, 1995, to authorize execution of this agreement, on the
terms and conditions set forth herein, by its Chairman Robert Feuchter, to be
effective as stated above. Said compensation is intended to be provided as an
adjunct to the base salary and bonus incentives already in place under the Key
Officers' Compensation Plan adopted by the Board at its meetings commencing on
May 15, 1994.
BASED ON THE FOREGOING FACTS AND CONCERNS, the parties agree as follows:
1. Term of Employment and Term of Severance Agreement.
A. Term of Employment. The services of Crist to ARC shall continue to
be based on an oral "terminable at will" employment relationship, under which
either he or ARC may terminate the relationship by not less than ninety (90)
days written notice. Neither party need provide any reason for the Notice of
Termination, and termination by ARC
1
<PAGE>
need not be for cause. Crist's base pay and bonus, if any, under the existing
Key Officers' Compensation Plan adopted as noted above shall not be changed in
any way by this agreement, and he shall be entitled to receive all such
compensation up to and including his last day of employment under any notice
given by either party. In case of termination under this paragraph 1, Crist
shall be entitled to continuation of all medical and other benefits required to
be offered to him under Federal or California law, at his expense for any period
required by law.
B. Term of Severance Agreement. The special Change of Control
provisions of this agreement shall apply to his employment during the period of
April 1, 1995 through and including March 31, 1997. Unless renewed by mutual
agreement, this Executive Severance Agreement shall expire at midnight on March
31, 1997.
2. Effect of Change of Control or Job Realignment.
A. Definitions.
(1.) Change of Control. For purposes of this agreement, a Change
of Control shall mean the occurrence of one or more of the following events:
(i.) ARC and/or the shareholders of ARC disposing of all or substantially all of
the assets or stock of ARC by means of a sale, a reorganization (other than one
to create a holding company or parent), a liquidation or otherwise; (ii.) a
tender offer or exchange offer being completed for all or any substantial
portion of the stock of ARC (representing at least thirty-three (33%) percent of
outstanding voting stock); or (iii.) if any person or entity and its affiliates
(as such term is used in the Securities Exchange Act of 1934, as amended) is or
becomes the owner of thirty-three (33%) percent of the voting stock of ARC.
However, ownership or acquisition of thirty-three (33%) percent or more of the
voting stock of ARC by the ARC Employee Stock Ownership Plan shall not be deemed
a change of control, for purposes of this agreement.
(2.) Job Realignment. For purposes of this agreement, a Job
Realignment shall be deemed to have occurred if one or more of the following
events takes place on or after the date of a Change of Control: (i.) the title
of Crist is changed to a lesser level of authority and responsibility, such as
Vice President, or the re-designation of his title as head of a division or
unit, rather than as a title for the whole company; (ii.) the scope of duties
and authority are reduced from those Crist presently holds, irrespective of
whether there is a change in Crist's job title; (iii.) the physical location of
Crist's business duties is changed from the Sacramento Metropolitan Area,
requiring that Crist move to or report to a different geographical location in
order to perform his assigned duties, or which would require that he commute
more than fifty miles one way to reach his primary office; (iv.) the corporate
headquarters of ARC is moved from the Sacramento Metropolitan Area, without his
concurrence, even if Crist is not required to move.
2
<PAGE>
B. Consequences of a Change of Control or Job Realignment. If a
Change of Control or Job Realignment event occurs during the term of this
agreement, Crist may, at his sole option, elect to resign from employment with
ARC at any time prior to April 1, 1997, and to receive the Executive Severance
Package described in paragraph 3, below. By making such an election, Crist will
be deemed to have resigned as of the date of his notice to ARC or as of any
effective date set forth in his notice of election, so long as it is not more
than ninety (90) days from the date of making the election. However, should ARC
elect to terminate his employment at will, for reasons related or unrelated to a
Change of Control or Job Realignment, but after a Change of Control or Job
Realignment event occurs, Crist shall be deemed to have resigned and elected
severance benefits hereunder, to commence on the same date his termination is
effective under the ARC Notice of Termination. This Executive Severance
Agreement shall have precedence over any Notice of Termination. In no event can
Crist elect to remain in the employment of ARC and also collect the severance
package.
3. Executive Severance Package.
A. Amount. The severance package for Crist shall consist of 28
months of salary, based on the Base Pay he would otherwise have been receiving
during the 28 month period from the effective date of his resignation (as
defined in paragraph 2. B.), plus the benefits package he would have been
entitled to at his executive level for that same period of time, as further
described below. For example, if his Base Pay was to have been $12,500 per
calendar month, for the period ending 12 months after resignation, and $12,833
for the next 12 months, and $13,000 for the next 12 months, his aggregate pay
package would be $12,500 times 12, plus $12,833 times 12, plus $13,000 times 4,
or a total of $356,000. Said severance package shall not be based on any bonus
or other compensation he might otherwise have been entitled to during such
period, but only the Base Pay.
B. Payout. At the election of Crist, made in the Notice of
Resignation due to change of control or job realignment, the severance pay shall
be paid either (1) in a lump sum due and payable not later than three working
days after the effective date of his resignation or ten days after the day on
which he delivers such Notice to ARC, whichever shall be the later event, or (2)
in 28 equal monthly installments commencing on the same date a lump sum payment
would otherwise be due. Neither death nor disability of Crist after an election
is made shall relieve the Company from its obligations hereunder. Any lump sum
payment shall be discounted based on a present value computation, made at seven
(7%) percent per annum, to reflect advance payment of the entire amount. Both
the lump sum or the installment payments shall be subject to appropriate
withholding and other deductions required by California and Federal laws.
C. Other Benefits. Commencing on the effective date of resignation,
and irrespective of whether he elects a lump sum or an installment payment of
the cash
3
<PAGE>
benefits, Crist shall also be entitled to receive, at the cost of ARC, all
medical, dental and other personal and family benefits which he was entitled to
receive as of the effective date of resignation by reason of his executive
position with ARC, for a full 28 month period. However, such benefits shall not
include continuing participation in the ARC ESOP, ESPP or any retirement, profit
sharing or option plan that may subsequently be adopted for officers or
employees, all of which shall terminate on the effective date of resignation.
D. Stock Options. To the extent that Crist holds any unvested
options to purchase stock in ARC, which did not vest because of the change of
control or otherwise before the effective date of resignation, all such options
shall, notwithstanding any other contrary provisions in the grants of option,
vest upon the date of the Notice of Resignation and be fully exercisable by
Crist in such Notice, and the payment for such stock shall, if he requests, be
offset from funds otherwise due him under this paragraph 3. Crist may also
request that other options held by him be exercised, and like offsets made out
of compensation otherwise due him in lieu of his being required to pay cash for
the exercise. All stock purchased under any options held by Crist shall be
delivered to him at the time any lump sum compensation would otherwise be
payable to him.
E. Interest, Legal Fees and Punitive Damages for Late Payment.
Should the payments and benefits due Crist under this agreement not be paid on
time, all sums due shall bear interest at seven (7%) percent per annum from the
due date, and be payable when the late payments are actually made. In addition,
Crist shall be entitled to recover reasonable legal fees and costs incurred
in enforcing collection of payments and benefits due hereunder, whether suit is
filed to enforce such rights or not. Conversely, in case of any litigation over
any aspect of this agreement, ARC shall be entitled to recover interest for
overpayments and attorney fees and costs in any aspect of the case where it
prevailed in the litigation. Furthermore, in the event that full payment is not
initially made to Crist, and in any litigation over remaining payments, if
the court finds that non-payment was wilful or intentional, ARC shall pay an
additional sum of $100,000 as punitive damages.
4. General Provisions.
A. Applicable Law; Jurisdiction. This agreement shall be governed by
California law. Any dispute concerning this agreement shall be brought in the
appropriate court in the County of Sacramento, California.
B. Waivers. No waiver of any right by either party to this agreement
shall have any effect on any other right created herein.
C. Invalidity. The invalidity or unenforceability of any provision of
this agreement shall have no effect on the rest of the provisions, and the
agreement shall be interpreted and construed in all respects as if such invalid
provision were omitted in the
4
<PAGE>
first instance.
D. Assignment. This agreement may not be assigned by either party without
the consent of the other. In case of the death of Crist while payments are due
or being made hereunder, such payments shall thereafter be paid to his estate or
to any person or entity whom he designates in his Notice of Resignation. The
right to elect the severance provisions of this agreement are, however,
personal, and may not be exercised by his executor or administrator.
E. Amendments. No modification, amendment, or waiver of any of the
provisions of this agreement shall be effective unless in writing, signed by
both parties hereto.
F. Notices. Any notice to be given by either party hereunder shall be in
writing and shall be deemed to have been given if delivered or mailed, certified
or registered mail, postage prepaid, as follows: To Crist at his residence
address shown from time to time on the payroll records of ARC, and to ARC at
11171 Sun Center Drive, Suite 120, Rancho Cordova, California 95670, or such
address as may subsequently be requested to be used by a party.
G. Entire Agreement. This agreement supersedes any prior oral or written
agreements concerning the subject matter of this agreement, other than the Key
Officers' Compensation Plan previously adopted and amended from time to time by
the Board of Directors, and currently in force.
5. Independent Representation. Crist has been advised that this agreement
has been prepared by legal counsel for ARC, his employer, and that he should be
independently represented in this transaction by attorneys of his choice, and
he has not relied in any way upon advice from counsel for ARC in this
transaction or in his decision to execute this agreement.
EXECUTED BY THE PARTIES, as set forth below, as of the Effective Date of April
1, 1995.
AMERICAN RECREATION CENTERS, INC.
BY /s/ ROBERT FEUCHTER /s/ ROBERT A. CRIST
------------------------------- --------------------------------------
Robert Feuchter, Chairman Robert A. Crist
of the Board of ARC "Crist"
5
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is between AMERICAN RECREATION CENTERS, INC., a California
corporation, and KAREN B. WAGNER, an individual, respectively referred to as
"ARC" and "Wagner." It shall be effective as of April 1, 1995, irrespective of
the actual date on which it is signed by the parties.
RECITALS OF FACT:
A. Wagner has served ARC as an officer and employee for a number of years,
during which her efforts and loyalty to ARC have resulted in significant
benefits to the shareholder owners of ARC, the employees of ARC, and its many
customers throughout the country. She is currently serving as Vice
President-Finance and Chief Financial Officer of ARC. She presently serves
without any written employment agreement.
B. The Board of Directors of ARC is concerned that, because of currently
pending third party efforts to take over control of ARC, Wagner may be placed in
a conflict between her loyalty and duties to the shareholders of ARC and her own
economic interests. To avoid this pressure on her, and to keep her focus on the
best interests of the shareholders in case of any change in control or
re-capitalization of the company, the Board, acting on a recommendation from its
Compensation Committee, desires to provide a means by which Wagner will be
protected from the consequences of unfair termination or reduction in her
authority and duties at the company by reason of change of control of ARC.
C. The Board believes it is in the best interests of ARC's shareholders to
have in place a written agreement that will pay Wagner a significant, but fair,
sum of termination compensation in the event of change of control, as defined in
this agreement, on the terms and conditions set forth herein, by its Chairman
Robert Feuchter, to be effective as stated above. Said compensation is intended
to be provided as an adjunct to the base salary and bonus incentives already in
place under the Key Officers' Compensation Plan adopted by the Board at its
meetings commencing on May 15, 1994.
BASED ON THE FOREGOING FACTS AND CONCERNS, the parties agree as follows:
1. Term of Employment and Term of Severance Agreement.
A. Term of Employment. The services of Wagner to ARC shall continue to be
based on an oral "terminable at will" employment relationship, under which
either she or
<PAGE>
ARC may terminate the relationship by not less than ninety (90) days written
notice. Neither party need provide any reason for the Notice of Termination, and
termination by ARC need not be for cause. Wagner's base pay and bonus, if any,
under the existing Key Officers' Compensation Plan adopted as noted above shall
not be changed in any way by this agreement, and she shall be entitled to
receive all such compensation up to and including her last day of employment
under any notice given by either party. In case of termination under this
paragraph 1, Wagner shall be entitled to continuation of all medical and other
benefits required to be offered to her under Federal or California law, at her
expense for any period required by law.
B. Term of Severance Agreement. The special Change of Control provisions of
this agreement shall apply to her employment during the period of April 1, 1995
through and including March 31, 1997. Unless renewed by mutual agreement, this
Executive Severance Agreement shall expire at midnight on March 31, 1997.
2. Effect of Change of Control or Job Realignment.
A. Definitions.
(1.) Change of Control. For purposes of this agreement, a Change of
Control shall mean the occurrence of one or more of the following events: (i.)
ARC and/or the shareholders of ARC disposing of all or substantially all of the
assets or stock of ARC by means of a sale, a reorganization (other than one to
create a holding company or parent), a liquidation or otherwise; (ii.) a tender
offer or exchange offer being completed for all or any substantial portion of
the stock of ARC (representing at least thirty-three (33%) percent of
outstanding voting stock); or (iii.) if any person or entity and its affiliates
(as such term is used in the Securities Exchange Act of 1934, as amended) is or
becomes the owner of thirty-three (33%) percent of the voting stock of ARC.
However, ownership or acquisition of thirty-three (33%) percent or more of the
voting stock of ARC by the ARC Employee Stock Ownership Plan shall not be deemed
a change of control, for purposes of this agreement.
(2.) Job Realignment. For purposes of this agreement, a Job Realignment
shall be deemed to have occurred if one or more of the following events takes
place on or after the date of a change of Control: (i.) the title of Wagner is
changed to a lesser level of authority and responsibility, such as no longer
serving as an officer, or the re-designation of her title as head of a division
or unit, rather than as a title for the whole company; (ii.) the scope of duties
and authority are reduced from those Wagner presently holds, irrespective of
whether there is a change in Wagner's job title; (iii.) the physical location of
Wagner's business duties is changed form the Sacramento Metropolitan Area,
requiring that Wagner move to or report to a different geographical location in
order to perform her assigned duties, or which would require that she commute
more than fifty miles one way
2
<PAGE>
to reach her primary office; (iv.) the corporate headquarters of ARC is moved
from the Sacramento Metropolitan Area, without her concurrence, even if Wagner
is not required to move.
B. Consequences of a Change of Control or Job Realignment. If a Change of
Control or Job Realignment event occurs during the term of this agreement,
Wagner may, at her sole option, elect to resign from employment with ARC at any
time prior to April 1, 1997, and to receive the Executive Severance Package
described in paragraph 3, below. By making such an election, Wagner will be
deemed to have resigned as of the date of her notice to ARC or as of any
effective date set forth in her notice of election, so long as it is not more
than ninety (90) days from the date of making the election. However, should ARC
elect to terminate her employment at will, for reasons related or unrelated to a
Change of Control or Job Realignment, but after a Change of Control or Job
Realignment event occurs, Wagner shall be deemed to have resigned and elected
severance benefits hereunder, to commence on the same date her termination is
effective under the ARC Notice of Termination. In no event can Wagner elect to
remain in the employment of ARC and also collect the severance package.
3. Executive Severance Package.
A. Amount. The severance package for Wagner shall consist of 12 months of
salary, based on the Base Pay she would otherwise have been receiving during the
12 month period from the effective date of her resignation (as defined in
paragraph 2.B.), plus the benefits package she would have been entitled to at
her executive level for that same period of time, as further described below.
For example, if her Base Pay was to have been $8,583 per calendar month, for the
period ending 12 months after resignation, her aggregate pay package would be a
total of $103,000. Said severance package shall not be based on any bonus or
other special compensation she might otherwise have been entitled to during such
period, but only the Base Pay.
B. Payout. At the election of Wagner, made in the Notice of Resignation due
to change of control or job realignment, the severance pay shall be paid either
(1) in a lump sum due and payable not later than three working days after the
effective date of her resignation or ten days after the day on which she
delivers such Notice to ARC, whichever shall be the later event, or (2) in 12
equal monthly installments commencing on the same date a lump sum payment would
otherwise be due. Neither death nor disability of Wagner after an election is
made shall relieve the Company from its obligations hereunder. Any lump sum
payment shall be discounted based on a present value computation, made at seven
(7%) percent per annum, to reflect advance payment of the entire amount. Both
the lump sum or the installment payments shall be subject to appropriate
withholding and other deductions required by California and Federal laws.
3
<PAGE>
C. Other Benefits. Commencing on the effective date of resignation,
and irrespective of whether she elects a lump sum or an installment payment of
the cash benefits, Wagner shall also be entitled to receive, at the cost of ARC,
all medical, dental and other personal and family benefits which she was
entitled to receive as of the effective date of resignation by reason of her
executive position with ARC, for a full 12 month period. However, such benefits
shall not include continuing participation in the ARC ESOP, ESPP or any
retirement, profit sharing or option plan that may subsequently be adopted for
officers or employees, all of which shall terminate on the effective date of
resignation.
D. Stock Options. To the extent that Wagner holds any unvested
options to purchase stock in ARC, which did not vest because of the change of
control or otherwise before the effective date of resignation, all such options
shall, notwithstanding any other contrary provisions in the grants of option,
vest upon the date of the Notice of Resignation and be fully exercisable by
Wagner in such Notice, and the payment for such stock shall, if she requests, be
offset from funds otherwise due her under this paragraph 3. Wagner may also
request that other options held by her be exercised, and like offsets made out
of compensation otherwise due her in lieu of her being required to pay cash for
the exercise. All stock purchased under any options held by Wagner shall be
delivered to her at the time any lump sum compensation would otherwise be
payable to her.
E. Interest, Legal Fees and Punitive Damages for Late Payment.
Should the payments and benefits due Wagner under this agreement not be paid on
time, all sums due shall bear interest at seven (7%) percent per annum from the
due date, and be payable when the late payments are actually made. In addition,
Wagner shall be entitled to recover reasonable legal fees and costs incurred
in enforcing collection of payments and benefits due hereunder, whether suit is
filed to enforce such rights or not. Conversely, in case of any litigation over
any aspect of this agreement, ARC shall be entitled to recover interest for
overpayments and attorney fees and costs in any aspect of the case where it
prevailed in the litigation. Furthermore, in the event that full payments, if
the court finds that non-payment was wilful or intentional, ARC shall pay an
additional sum of $50,000 as punitive damages.
4. General Provisions.
A. Applicable Law; Jurisdiction. This agreement shall be governed by
California law. Any dispute concerning this agreement shall be brought in the
appropriate court in the County of Sacramento, California.
B. Waivers. No waiver of any right by either party to this agreement
shall have any effect on any other right created herein.
4
<PAGE>
C. Invalidity. The invalidity or unenforceability of any provision of this
agreement shall have no effect on the rest of the provisions, and the agreement
shall be interpreted and construed in all respects as if such invalid
provision were omitted in the first instance.
D. Assignment. This agreement may not be assigned by either party without
the consent of the other. In case of the death of Wagner while payments are due
or being made hereunder, such payments shall thereafter be paid to her estate or
to any person or entity whom she designates in her Notice of Resignation. The
right to elect the severance provisions of this agreement are, however,
personal, and may not be exercised by her executor or administrator.
E. Amendments. No modification, amendment, or waiver of any of the
provisions of this agreement shall be effective unless in writing, signed by
both parties hereto.
F. Notices. Any notice to be given by either party hereunder shall be in
writing and shall be deemed to have been given if delivered or mailed, certified
or registered mail, postage prepaid, as follows: To Wagner at her residence
address shown from time to time on the payroll records of ARC, and to ARC at
11171 Sun Center Drive, Suite 120, Rancho Cordova, California 95670, or such
address as may subsequently be requested to be used by a party.
G. Entire Agreement. This agreement supersedes any prior oral or written
agreements concerning the subject matter of this agreement, other than the Key
Officers' Compensation Plan previously adopted and amended from time to time by
the Board of Directors, and currently in force.
5. Independent Representation. Wagner has been advised that this agreement
has been prepared by legal counsel for ARC, her employer, and that she should be
independently represented in this transaction by attorneys of her choice, and
she has not relied in any way upon advice from counsel for ARC in this
transaction or in her decision to execute this agreement.
EXECUTED BY THE PARTIES, as set forth below, as of the Effective Date of April
1, 1995.
AMERICAN RECREATION CENTERS, INC.
BY /s/ ROBERT FEUCHTER /s/ KAREN B. WAGNER
------------------------------- --------------------------------------
Robert Feuchter, Chairman Karen B. Wagner
of the Board of ARC "Wagner"
5
<PAGE>
EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is between AMERICAN RECREATION CENTERS, INC., a California
corporation, and SUSAN K. COOK, an individual, respectively referred to as "ARC"
and "Cook." It shall be effective as of April 1, 1995, irrespective of the
actual date on which it is signed by the parties.
RECITALS OF FACT:
A. Cook has served ARC as an officer and employee for several years, during
which her efforts and loyalty to ARC have resulted in significant benefits to
the shareholder owners of ARC, the employees of ARC, and its many customers
throughout California. She is currently serving as Vice-President-California
Bowling Division of ARC. She presently serves without any written employment
agreement.
B. The Board of Directors of ARC is concerned that, because of currently
pending third party efforts to take over control of ARC, Cook may be placed in a
conflict between her loyalty and duties to the shareholders of ARC and her own
economic interests. To avoid this pressure on her, and to keep her focus on the
best interests of the shareholders in case of any change of control or
re-capitalization of the company, the Board, acting on a recommendation from its
Compensation Committee, desires to provide a means by which Cook will be
protected from the consequences of unfair termination or reduction in her
authority and duties at the company by reason of change of control or ARC.
C. The Board believes it is in the best interests of ARC's shareholders to
have in place a written agreement that will pay Cook a significant, but fair,
sum of termination compensation in the event of change of control, as defined in
this agreement. It, therefore, voted unanimously to authorize execution of this
agreement, on the terms and conditions set forth herein, by its Chairman Robert
Feuchter, to be effective as stated above. Said compensation is intended to be
provided as an adjunct to the base salary and bonus incentives already in place
under the Key Officers' Compensation Plan adopted by the Board at its meetings
commencing on May 15, 1994.
BASED ON THE FOREGOING FACTS AND CONCERNS, the parties agree as follows:
1. Term of Employment and Term of Severance Agreement.
A. Term of Employment. The services of Cook to ARC shall continue to be
based on an oral "terminable at will" employment relationship, under which
either she or ARC may terminate the relationship by not less than ninety (90)
days written notice. Neither party need provide any reason for the Notice of
Termination, and termination by ARC
<PAGE>
need not be for cause. Cook's base pay and bonus, if any, under the existing Key
Officers' Compensation Plan adopted as noted above shall not be changed in any
way by this agreement, and she shall be entitled to receive all such
compensation up to and including her last day of employment under any notice
given by either party. In case of termination under this paragraph 1, Cook shall
be entitled to continuation of all medical and other benefits required to be
offered to her under Federal or California law, at her expense for any period
required by law.
B. Term of Severance Agreement. The special Change of Control
provisions of this agreement shall apply to her employment during the period of
April 1, 1995 through and including March 31, 1997. Unless renewed by mutual
agreement, this Executive Severance Agreement shall expire at midnight on March
31, 1997.
2. Effect of Change of Control or Job Realignment.
A. Definitions.
(1.) Change of Control. For purposes of this agreement, a
Change of Control shall mean the occurrence of one or more of the following
events: (i.) ARC and/or the shareholders of ARC disposing of all or
substantially all of the assets or stock of ARC by means of a sale, a
reorganization (other than one to create a holding company or parent), a
liquidation or otherwise; (ii.) a tender offer or exchange offer being completed
for all or any substantial portion of the stock of ARC (representing at least
thirty-three (33%) percent of outstanding voting stock); or (iii.) if any person
or entity and its affiliates (as such term is used in the Securities Exchange
Act of 1934, as amended) is or becomes the owner of thirty-three (33%) percent
or more of the voting stock of ARC by the ARC Employee Stock Ownership Plan
shall not be deemed a change of control, for purposes of this agreement.
(2.) Job Realignment. For purposes of this agreement, a Job
Realignment shall be deemed to have occurred if one or more of the following
events takes place on or after the date of a Change of Control: (i.) the title
of Cook is changed to a lesser level of authority and responsibility, such as no
longer serving as an officer or the re-designation of her title as head of a
division or unit, rather than as a title for the whole of California; (ii.) the
scope of duties and authority are reduced from those Cook presently holds,
irrespective of whether there is a change in Cook's job title; (iii.) the
physical location of Cook's business duties is changed from the Sacramento
Metropolitan Area, requiring that Cook move to or report to a different
geographical location in order to perform her assigned duties, or which would
require that she commute more than fifty miles one way to reach her primary
office; (iv.) the corporate headquarters of ARC is moved from the Sacramento
Metropolitan Area, without her concurrence, even if Cook is not required to
move.
2
<PAGE>
B. Consequences of a Change of Control or Job Realignment. If a Change
of Control or Job Realignment event occurs during the term of this agreement,
Cook may, at her sole option, elect to resign from employment with ARC at any
time prior to April 1, 1997, and to receive the Executive Severance Package
described in paragraph 3, below. By making such an election, Cook will be deemed
to have resigned as of the date of her notice to ARC or as of any effective date
set forth in her notice of election, so long as it is not more than ninety (90)
days from the date of making the election. However, should ARC elect to
terminate her employment at will, for reasons related or unrelated to a Change
of Control or Job Realignment, but after a Change of Control or Job Realignment
event occurs, Cook shall be deemed to have resigned and elected severance
benefits hereunder, to commence on the same date her termination is effective
under the ARC Notice of Termination. This Executive Severance Agreement shall
have precedence over any Notice of Termination. In no event can Cook elect to
remain in the employment of ARC and also collect the severance package.
3. Executive Severance Package.
A. Amount. The severance package for Cook shall consist of 12 months
of salary, based on the Base Pay she would otherwise have been receiving during
the 12 month period from the effective date of her resignation (as defined in
paragraph 2. B.), plus the benefits package she would have been entitled to at
her executive level for that same period of time, as further described below.
For example, if her Base Pay was to have been $7,750 per calendar month, for the
period ending 12 months after resignation, then her aggregate severance pay
package would be $93,000. Said severance package shall not be based on any bonus
or other special compensation she might otherwise have been entitled to during
such period, but only the Base Pay.
B. Payout. At the election of Cook, made in the Notice of
Resignation due to change of control or job realignment, the severance pay
shall be paid either (1) in a lump sum due and payable not later than three
working days after the effective date of her resignation or ten days after the
day on which she delivers such Notice to ARC, whichever shall be the later
event, or (2) in 12 equal monthly installments commencing on the same date a
lump sum payment would otherwise be due. Neither death nor disability of Cook
after an election is made shall relieve the Company from its obligations
hereunder. Any lump sum payment shall be discounted based on a present value
computation, made at seven (7%) percent per annum, to reflect advance payment of
the entire amount. Both the lump sum or the installment payments shall be
subject to appropriate withholding and other deductions required by California
and Federal laws.
C. Other Benefits. Commencing on the effective date of resignation,
and irrespective of whether she elects a lump sum or an installment payment of
the cash
3
<PAGE>
benefits, Cook shall also be entitled to receive, at the cost of ARC, all
medical, dental, and other personal and family benefits which she was entitled
to receive as of the effective date of resignation by reason of her executive
position with ARC, for a full 12 month period. However, such benefits shall not
include continuing participation in the ARC ESOP, ESPP or any retirement, profit
sharing or option plan that may subsequently be adopted for officers or
employees, all of which shall terminate on the effective date of resignation.
D. Stock Options. To the extent that Cook holds any unvested options to
purchase stock in ARC, which did not vest because of the change of control or
otherwise before the effective date of resignation, all such options shall,
notwithstanding any other contrary provisions in the grants of option, vest upon
the date of the Notice of Resignation and be fully exercisable by Cook in such
Notice, and the payment for such stock shall be offset, if she requests, from
funds otherwise due her under this paragraph 3. Cook may also request that other
options held by her be exercised, and like offsets made out of compensation
otherwise due her in lieu of her being required to pay cash for the exercise.
All stock purchased under any options held by Cook shall be delivered to her at
the time any lump sum compensation would otherwise be payable to her.
E. Interest, Legal Fees and Punitive Damages for Late Payment. Should the
payments and benefits due Cook under this agreement not be paid on time, all
sums due shall bear interest at seven (7%) percent per annum from the due date,
and be payable when the late payments are actually made. In addition, Cook shall
be entitled to recover reasonable legal fees and costs incurred in enforcing
collection of payments and benefits due hereunder, whether suit is filed to
enforce such rights, or not. Conversely, in case of any litigation over any
aspect of this agreement, ARC shall be entitled to recover interest for
overpayments and attorney fees and costs in any aspect of the case where it
prevailed in the litigation. Furthermore, in the event that full payment is not
initially made to Cook, and in any litigation over remaining payments, if the
court finds that non-payment was wilful or intentional, ARC shall pay an
additional sum of $50,000 as punitive damages.
4. General Provisions.
A. Applicable Law; Jurisdiction. This agreement shall be governed by
California law. Any dispute concerning this agreement shall be brought in the
appropriate court in the County of Sacramento, California.
B. Waivers. No waiver of any right by either party to this agreement shall
have any effect on any other right created herein.
C. Invalidity. The invalidity or unenforceability of any provision of this
agreement shall have no effect on the rest of the provisions, and the agreement
shall be interpreted and construed in all respects as if such invalid provision
were omitted in the
4
<PAGE>
first instance.
D. Assignment. This agreement may not be assigned by either party without
the consent of the other. In case of the death of Cook while payments are due or
being made hereunder, such payments shall thereafter be paid to her estate or to
any person or entity whom she designates in her Notice of Resignation. The right
to elect the severance provisions of this agreement are, however, personal, and
may not be exercised by her executor or administrator.
E. Amendments. No modification, amendment, or waiver of any of the
provisions of this agreement shall be effective unless in writing, signed by
both parties hereto.
F. Notices. Any notice to be given by either party hereunder shall be in
writing and shall be deemed to have been given if delivered or mailed, certified
or registered mail, postage prepaid, as follows: To Cook at her residence
address shown from time to time on the payroll records of ARC, and to ARC at
11171 Sun Center Drive, Suite 120, Rancho Cordova, California 95670, or such
address as may subsequently be requested to be used by a party.
G. Entire Agreement. This agreement supersedes any prior oral or written
agreements concerning the subject matter of this agreement, other than the Key
Officers' Compensation Plan previously adopted and amended from time to time by
the Board of Directors, and currently in force.
5. Independent Representation. Cook has been advised that this agreement
has been prepared by legal counsel for ARC, her employer, and that she should be
independently represented in this transaction by attorneys of her choice, and
she has not relied in any way upon advice from counsel for ARC in this
transaction or in her decision to execute this agreement.
EXECUTED BY THE PARTIES, as set forth below, as of the Effective Date of April
1, 1995.
AMERICAN RECREATION CENTERS, INC.
BY /s/ ROBERT FEUCHTER /s/ SUSAN K. COOK
--------------------------- ------------------------------------
Robert Feuchter, Chairman Susan K. Cook
of the Board of ARC "Cook"
5
<PAGE>
To Our Shareholders
An increasingly popular concept in management circles today is that of
corporate "transformation", a process of corporate change that is deeper
than a mere transition. As fiscal year 1996 begins, American Recreation
Centers, Inc. has taken the first steps to effect its own
transformation--from a company historically dependent on bowling to one
that offers an expanded menu of family entertainment options including
bowling, at neighborhood locations in six states.
For many years, management and your Board of Directors have tempered
ARC's dependence on bowling through diversification into unrelated
businesses. In the 1970's and early 1980's, for example, ARC made
significant investments in commercial real estate. In 1988, we
exchanged $3.2 million ARC stock for all the shares of an infants'
products company, The Right Start, Inc. The objective was to spread
business risk among multiple, unrelated industries.
While these diversification efforts did generate several years of
sustained benefits for ARC, industry problems eventually arose, creating
financial hardships for the Company. The real estate industry in
California suffered through a deep slump and has yet to fully recover.
And Right Start, after several years of rapid growth in revenue and
profits, posted disappointing results in the past two years, masking
progress in ARC's bowling division and penalizing our overall operating
performance.
Through these years, our core bowling business has produced relatively
reliable and sustainable cash flow. Also, as the industry consolidated,
we took advantage of our size and financial strength to add locations.
In the past three fiscal years, for example, we added 15 bowling
centers and extended our reach from two states into six states.
While bowling has been a good business for ARC for nearly 40 years, it
along has become too narrow a focus for us to prosper and grow in the
future. We need to participate in the family entertainment concepts that
are proliferating in communities we serve. Consequently, we intend to
redirect resources to growing our own family entertainment business.
We took two important steps in fiscal 1995 to begin that process. Early
in the year, the Board of Directors approved the conversion of 10 lanes
at Oakridge Lanes in San Jose, California to a family entertainment
complex geared to young children and their parents. Also, the Board
approved the construction of ARC's first new family entertainment center
in the Dallas, Texas suburb of Addison. This $4.6 million, 49,000 square
foot facility, which we named "Fun Fest", will have 30 lanes devoted to
bowling and an equal amount of space devoted to young adult-oriented
entertainment. These two facilities represent ARC's first efforts into
what the recreation industry refers to as an FEC, or "Family
Entertainment Center".
<PAGE>
So what does an FEC include? If you see children playing in "soft play"
structures or families enjoying time together at theme parks featuring
miniature golf, batting cages, golf ranges, laser tag, bumper cars,
video arcades, go-cart tracks, water slides--these are examples of
family entertainment. They appeal to all members of the family, not
just the bowlers.
In preparation for this transformation into a family entertainment
company, we've been divesting ourselves of non-bowling real estate for
a period of years. In fiscal 1993 and fiscal 1994, we sold two real
estate investments in Oakland, California. Early in fiscal 1995, we
sold the mini-warehouse in Milpitas, California for a gain of over $2
million (while retaining our bowling center there). And in early August
1995 well into fiscal 1996's first quarter, we sold our remaining 62.5
percent interest in Right Start to a prominent Los Angeles financial
group, Kayne, Anderson Investment Management, Inc. The proceeds from the
Right Start sale totaled $11.8 million, with $6.7 million available
after taxes and expenses. There's no doubt that ARC's investment in
Right Start was a home run, even if we did strike out in recent quarters.
The Right Start sale has put us in an excellent financial position to
grow the family entertainment concept. We are anxious for customer
feedback from our FEC conversion at Oakridge lanes and the new Addison
complex as they come on stream later in 1995. While we are certain there
will be a learning curve, we are confident that our expanded view of
family entertainment will eventually enable us to generate more revenue
and income from our 40 sites. Moreover, we will continue to acquire
good bowling centers as they come available and be on the lookout for
family entertainment complexes and concepts that can enable us to grow.
After nearly two decades of diversification outside our traditional
entertainment industry roots, we are now diversifying within the
industry we know. And our control of 40 locations gives ARC the ability
to grow our FEC business quickly as the concepts develop to their full
potential.
These new directions are very exciting and open up a whole new realm of
possibilities for us in the future, all within our existing sphere of
entertainment knowledge. We look forward to fiscal 1996 and beyond. By
the turn of the century, we expect American Recreation Centers to be
viewed as one of the most progressive--and successful--bowling anchored
family entertainment businesses. That is our goal.
The following pages will give you an overview of the Company's operations
for fiscal 1995. We have also included the last two news releases
regarding the sale of our interest in Right Start and our year-end
results. We hope that you find the enclosed information informative.
Sincerely,
/s/ Robert Feuchter /s/ Robert A. Crist
Robert Feuchter Robert A. Crist
Chairman of the Board President and Chief Executive Officer
<PAGE>
ABOUT THE COMPANY
American Recreation Centers, Inc. (ARC) is one of the largest chain
operators of bowling centers in the United States and the largest
publicly-owned company whose principal business is bowling and
recreation.
The Company's bowling operations include 40 bowling centers, 21 in
California, eight in Texas (including one under construction), six in
Wisconsin, three in Oklahoma and one each in Kentucky and Missouri with
a total of 1,572 lanes. The non-California centers are owned and
operated by three 85 percent company-owned joint ventures, Triangle
Bowl Associates, American Red Carpet and Mid-America Associates.
League bowling provides stability to the bowling industry through
commitments to use lanes at specific times on a periodic basis.
Approximately 61 percent of ARC's bowling revenue was derived from
league bowling during 1995 and approximately 60,000 bowlers regularly
participate in ARC league programs. Non-league bowling, consisting of
open play and special events, is also an important contributor of
revenue and profits.
ARC plans to leverage the broad appeal of bowling by creating a wide
variety of entertainment attractions within its centers which are
designed to increase the frequency and revenue per customer per visit. A
49,000 square foot family entertainment center is under construction in
Addison, Texas. Opening in the fall of 1995, it will contain 30 lanes of
bowling, and will feature branded food operations, high tech electronic
games including virtual reality and laser activities, billiards, darts,
and other recreational attractions. Ten lanes of a former 60-lane
center in San Jose, California are being converted to include
children's soft-play, redemption games and branded food operations.
Subsequent to year-end, the Company sold its majority-owned subsidiary.
The Right Start, Inc. (NASDAQ: RTST), a catalog company and retailer of
infant's and children's products for $11,800,000 in cash. The Company
recorded a $2,300,000, or $.46 per share after-tax gain on the sale
during its first quarter of 1996, ARC's investment in The Right Start,
Inc. and its results of operations have been reported as discontinued
operations in the accompanying financial statements.
The Company's common stock is traded on the NASDAQ National Market
System under the symbol AMRC. Stock prices are quoted daily and appear
in the Wall Street Journal and other newspapers. At May 31, 1995, the
Company had approximately 4,700 shareholder accounts.
<TABLE>
----------------------------------------------------------------
<C> <S> <C>
TABLE OF CONTENTS Financial Highlights 2
Selected Financial Data 3
Management's Discussion and Analysis 4
Consolidated Financial Statements 6
Notes to Consolidate Financial Statements 9
Report of Independent Accountants 14
Officers and Directors 15
Corporate Information 15
Company Locations 16
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
May 31, May 25, May 26,
Dollars in thousands, except per share amounts 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 45,694 $ 41,196 $ 38,763
Operating income 5,513 5,884 4,694
Net income (loss):
Continuing operations 2,927 1,777 1,186
Discontinued operations (1,316) 112 655
-------- ------- -------
1,611 1,889 1,841
-------- ------- -------
Earnings (Loss) per share:
Continuing operations .58 .36 .24
Discontinued operations (.26) .02 .14
-------- ------- -------
.32 .38 .38
-------- ------- -------
Cash dividends per share .2425 .225 .205
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------
May 31, May 25, May 26, May 27, May 29,
Dollars in thousands, except per share amounts 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $ 45,694 $ 41,196 $ 38,783 $ 37,868 $ 35,360
Net income (loss):
Continuing operations 2,927 1,777 1,186 2,266 1,294
Discontinued operations (1,316) 112 655 720 1,250
-------- -------- -------- -------- --------
1,611 1,889 1,841 2,986 2,544
Net income from continuing operations
as a percent of operating revenue 6.4% 4.3% 3.1% 6.0% 3.7%
Earnings (Loss) per share:
Continuing operations .58 .36 .24 .45 .27
Discontinued operations (.26) .02 .14 .15 .25
-------- -------- -------- -------- --------
.32 .38 .38 .60 .52
-------- -------- -------- -------- --------
Cash dividends per share .2425 .225 .205 .185 .165
Shareholders' equity per share 5.87 5.77 5.56 5.36 4.82
Return on equity 5% 7% 7% 12% 11%
Total assets 76,925 73,439 70,020 65,932 57,462
Long-term debt and capital leases
(includes current maturities) 30,385 31,315 30,516 28,822 24,234
</TABLE>
QUARTERLY DATA AND MARKET PRICE INFORMATION
The following table sets forth supplementary financial information for each
quarter in the Company's fiscal years ended May 31, 1995 and May 25, 1994.
<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS ENDED August 24, November 23, February 22, May 31,
Dollars in thousands, except per share amounts 1994 1994 1995 1995
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $ 8,310 $ 11,405 $ 12,916 $ 13,063
Operating income(loss) (336) 1,473 2,438 1,938
Net income (loss):
Continuing operations 496 429 1,289 713
Discontinued operations 34 (897) (396) (57)
-------- --------- --------- --------
530 (468) 893 656
-------- --------- --------- --------
Earnings (Loss) per share:
Continuing operations .10 .08 .26 .14
Discontinued operations .01 (.18) (.08) (.01)
-------- --------- --------- --------
.11 (.10) .18 .13
-------- --------- --------- --------
Price range
High 7.00 7.00 6.50 7.625
Low 6.375 5.875 4.50 6.125
Dividends paid .06 .06 .06 .0625
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1994 QUARTERS ENDED August 25, November 24, February 23, May 24,
Dollars in thousands, except per share amounts 1993 1993 1994 1994
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $ 8,805 $ 10,150 $ 11,362 $ 10,879
Operating income 384 1,308 2,196 1,996
Net income(loss):
Continuing operations 25 333 792 627
Discontinued operations 117 (328) 97 226
-------- --------- --------- ---------
142 5 889 853
-------- --------- --------- ---------
Earnings (Loss) per share:
Continuing operations .01 .07 .16 .12
Discontinued operations .02 (.07) .02 .05
-------- --------- --------- ---------
.03 .00 .18 .17
-------- --------- --------- ---------
Price range
High 7.75 7.75 6.50 7.00
Low 6.00 5.75 5.625 6.125
Dividends paid .055 .055 .055 .06
</TABLE>
The quarterly information has been restated from that previously filed in the
Company's Form 10-Qs to reflect the Company's commitment to dispose of its
majority-owned subsidiary, The Right Start, Inc. The results of operations of
The Right Start, Inc. were previously included in the consolidated results as
the direct marketing division. They have been reclassified as income (loss) from
discontinued operations. (See Note 2 and Note 8).
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS For an understanding of the significant factors that
influenced the Company's performance during the past three fiscal years, this
discussion and analysis should be read in conjunction with the consolidated
financial statements which appear on pages 6 through 13 of this report.
DISCONTINUED OPERATIONS Subsequent to year-end, the Company sold its majority
interest in The Right Start, Inc., a catalog company and retailer of infants'
and children's products. An after-tax gain on the sale of approximately
$2,300,000 will be recorded in the Company's first quarter of 1996.
AS A RESULT OF THE SALE, the consolidated financial statements have been
retroactively restated to classify the Company's Investment in The Right Start,
Inc., and the results of its operations as discontinued operations. In prior
years, the Company's financial statements had included the assets and
liabilities of The Right Start, Inc., in the consolidated balance sheet less a
minority interest liability for the equity related to the shares not owned by
the Company. Additionally, The Right Start, Inc.'s results of operations were
included in the Company's consolidated statement of income and segment footnote
as the direct marketing division, less a minority interest for the results
attributed to other shareholders. Significant data related to the sale and to
discontinued operations is included in Note 2.
RESULTS Of CONTINUING OPERATIONS The Company's operating revenue increased 11%
in 1995 and 6% in 1994 due to acquisitions. Net income from continuing
operations, which totaled $2,927,000 in 1995, $1,777,000 in 1994, and $1,186,000
in 1993 was significantly impacted each year by non-operating transactions.
These transactions and operating results are discussed below.
BOWLING Bowling is the Company's core business and its growth in recent years
has been achieved through acquisitions. Six bowling centers comprising most of
the former Red Carpet chain in Milwaukee, Wisconsin were acquired in the second
quarter of 1995. These centers aggregated 316 lanes. Also during 1995, a 36-lane
center in Fresno, California was reacquired as payment in lieu of a note
receivable and the land and building of a 60-lane center in San Pablo,
California was sold. The bowling equipment from the San Pablo center was
redeployed to other centers. In 1994, four centers totaling 136 lanes were
purchased.
BOWLING revenue rose over 12% in 1995 due to acquisitions. In addition, 1995 was
a 53 week fiscal year while fiscal 1994 included 52 weeks. Revenue in 1994 also
increased 12% over 1993 levels due to acquisitions. Bowling revenue for
comparable centers declined 1% in 1995 (almost 3% when the impact of the 53rd
week is eliminated). The decline in 1994 for comparable centers was nearly 3%.
In 1995, games bowled declined 1% on a comparable year basis and the average
price per game dropped almost 2%. In 1994, games bowled declined 2% and prices
held steady. In both years, league bowling decreased while casual bowling
increased.
Military base closures negatively impacted revenue for 1995 and 1994 at two San
Francisco Bay Area and five Sacramento centers. Another Sacramento area Air
Force base and an Orange County, California Marine air base were recently added
to the base closure list and this is likely to impact revenue, particularly for
the center nearest the bases. Additionally, in 1994 and part of 1995, certain
local governments passed smoking legislation that impacted revenue at
approximately seven California centers by preventing or limiting smoking in
business establishments in certain communities. These local ordinances
negatively impacted six of the centers and benefited one. Effective January
1995, the State of California has implemented smoking ordinances that uniformly
impact all bowling centers.
Operating income in 1995 was even with 1994 levels as operating income from
newly acquired centers was offset by a 15% decline in profitability for
comparable centers. The decline in profitability was due to the overall drop in
revenue which was so pronounced in certain centers due to the factors discussed
above that cost controls could not mitigate the loss of revenue. Bowling
operating income rose 19% overall in 1994 due to acquisitions combined with an
8% increase in operating income for comparable centers despite the decrease in
comparable centers' revenue. At many locations, bowling center managers were
able to offset the decline in revenue through cost control. Additionally,
operating income benefited from the 1993 restructuring of the California bowling
division which reduced overhead costs in 1994.
Late in 1995, the Company embarked upon a plan to test the concept of broadening
the Company's operations from one that offers primarily bowling as family
entertainment into one that offers a broader menu of recreation options, with
bowling being only one alternative. Two test
<PAGE>
locations are currently underway and are expected to be in operation by the
second quarter of 1996. Ten bowling lanes of a 60-lane center in San Jose,
California are being converted to space that provides for other forms of
entertainment and expanded food and beverage operations targeted primarily to
families with young children. Secondly, a 49,000 square foot family
entertainment center in Addison, Texas is under construction. This facility will
blend bowling with other recreation formats designed to attract young adult
customers. Both concepts are designed to create a broader base of entertainment
revenue in our facilities. Future expansion of these concepts will be based on
the results of these two tests.
CORPORATE AND OTHER Other operating activities include the Company's
non-bowling real estate activities in 1995, 1994 and 1993. In 1993, other
activities also included the operations of the Company's wholly-owned
subsidiary, Just Games, Inc., which was sold on May 26, 1993. The decline in
1995's other operating revenue and operating income is attributable to the sale
of the Budget Mini-Storage in Milpitas, California (Note 3).
Corporate expense includes the costs of the corporate office and staff,
shareholder relations, directors' fees, professional and consulting fees, and
other costs not allocable to bowling. Corporate expense increased 14% in 1995
due primarily to the costs of investment banking and related services incurred
in connection with an unsolicited offer for the acquisition of the Company.
Corporate expense declined 7% in 1994.
GAIN (LOSS) ON PROPERTY TRANSACTIONS It is the Company's policy to
strategically sell its non-bowling real estate and redeploy the proceeds to
operating activities. Gains and losses on the disposition of such assets have
been recognized in 1995, 1994 and 1993 and are described in Note 3 to the
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES Cash generated from continuing operations was
$7,200,000 in 1995. Financing activities included the payment of $1,200,000 in
dividends to shareholders, refinancing of $2,900,000 in existing debt, repayment
of $9,400,000 in long-term debt, and $8,500,000 in new long-term debt to finance
acquisitions and other capital expenditures.
Investing activities, which represented an aggregate $4,300,000 use of cash,
included $8,500,000 in proceeds from property transactions. This was offset by
$12,900,000 expended by the bowling division for the acquisition and
refurbishing of bowling centers and for the purchase of equipment for bowling
centers. In 1996, the Company plans to expend $4,500,000 on the construction of
the Addison, Texas family entertainment center and ten lane conversion of the
San Jose, California center. An additional $1,800,000 is expected to be expended
on the remodeling and refurbishing of centers. These capital expenditures will
be financed through cash generated from operations and long-term bank financing.
In addition, the Company has approximately $6,700,000 after-tax proceeds from
the sale of its interest in Right Start.
At May 31, 1995, the Company had $10,200,000 available under an unused bank
commitment. Advances can be used to acquire, construct or refurbish bowling
centers or to acquire other comparable recreation businesses and would bear
interest at the prime rate plus .75%. An 85% owned joint venture has $2,700,000
available under a separate bank commitment that can be used for the acquisition
of bowling centers. Advances under this facility would bear interest at the
prime rate plus 1%.
The Company also maintains various line-of-credit arrangements to augment
seasonal shortfalls in working capital. At May 31, 1995 and May 25, 1994, there
were no borrowings outstanding under the Company's $2,000,000 line-of-credit.
Advances under this line would bear interest at the prime rate plus .5%. There
was $415,000 and $465,000 outstanding at May 31, 1995 and May 25, 1994 under a
$1,000,000 line-of-credit which is designated for use by one of the Company's
wholly-owned subsidiaries. This line bears interest at the prime rate plus 1%.
The Company has paid quarterly cash dividends for 27 consecutive years. Cash
dividends for 1995 of $.2425 per share represent an 8% increase over 1994's
dividend which was up to 10% over 1993's dividend.
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
May 31, May 25,
Dollars in thousands 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 4,508 $ 3,513
Accounts receivable 274 454
Inventories 510 391
Other current assets 1,510 1,139
Net investment in discontinued operations 6,683 7,999
-------- --------
Total current assets 13,485 13,496
-------- --------
Property, equipment and leaseholds, at cost
Land and buildings 40,466 36,923
Machinery and equipment 34,922 31,846
Leaseholds and leasehold improvements 7,201 6,912
Construction in progress 892 --
-------- --------
83,481 75,681
Less-Accumulated depreciation and amortization (26,018) (24,056)
-------- --------
57,463 51,625
-------- --------
Property held for sale 2,545 5,437
Notes receivable 2,267 1,631
Other assets 1,165 1,250
-------- --------
$ 76,925 $ 73,439
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,191 $ 3,481
Current deferred taxes 2,311 2,377
Current maturities of long-term debt and capital leases 1,638 2,190
Accrued salaries and related expenses 987 812
Short-term borrowings 415 465
-------- --------
Total current liabilities 9,542 9,325
-------- --------
Long-term debt and capital leases 28,747 29,125
-------- --------
Income taxes deferred to future years 7,233 4,974
-------- --------
Minority interests 1,732 1,135
-------- --------
Shareholders' equity:
Common stock:
Authorized--21,484,375 shares
issued and outstanding--1995, 5,054,259
shares; 1994, 5,003,553 shares 12,773 12,440
Preferred stock:
Authorized--5,000,000 shares
issued and outstanding--None
Retained earnings 16,898 16,494
Loan to ESOP -- (54)
-------- --------
Total shareholders' equity 29,671 28,880
-------- --------
Commitments and contingencies
$ 76,925 $ 73,439
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Income and Retained Earnings
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
May 31, May 25, May 26,
Dollars in thousands, except per share amounts 1995 1994 1993
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue:
Bowling $ 44,687 $ 39,690 $ 35,482
Other 1,007 1,506 3,281
-------- -------- --------
45,694 41,196 38,763
-------- -------- --------
Operating, general and administrative expense:
Bowling 38,505 33,540 30,294
Other 535 770 2,701
Corporate 1,141 1,002 1,074
-------- -------- --------
40,181 35,312 34,069
-------- -------- --------
Operating income (loss):
Bowling 6,182 6,150 5,188
Other 472 736 580
Corporate (1,141) (1,002) (1,074)
-------- -------- --------
Operating income 5,513 5,884 4,694
Interest expense (2,984) (2,759) (2,645)
Interest and other income 331 242 279
Gain (Loss) on property transactions, net 2,483 (509) (296)
Gain on sale of subsidiary's stock -- 297 --
-------- -------- --------
Income from continuing operations before provision for
income taxes and minority interests 5,343 3,155 2,032
Provision for income taxes (1,867) (1,102) (683)
Minority interests (549) (276) (163)
-------- -------- --------
Income from continuing operations 2,927 1,777 1,186
Discontinued operations:
(Loss) income from operations of The Right Start, Inc., net of
applicable income taxes of ($1,254), $102, and $631 (1,316) 112 655
-------- -------- --------
Net income 1,611 1,889 1,841
Retained earnings, beginning of year 16,494 15,678 14,839
Cash dividends ($.2425, $.225 and $.205 per share) (1,220) (1,116) (1,002)
Income tax benefits 13 43 --
-------- -------- --------
Retained earnings, end of year $ 16,898 $ 16,494 $ 15,678
======== ======== ========
Earnings per share:
Continuing operations $ .58 $ .36 $ .24
Discontinued operations (.26) .02 .14
-------- -------- --------
$ .32 $ .38 $ .38
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------
May 31, May 25, May 26,
Dollars in thousands 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,611 $ 1,889 $ 1,841
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,390 3,137 2,782
Gain on sale of subsidiary's stock -- (297) --
(Gain) Loss from property transactions (2,483) 509 296
Results attributed to minority interests 549 276 163
Increase in deferred income taxes 2,193 1,132 336
Increase in inventories (119) (48) (47)
Loss (Income) from discontinued operations 1,316 (112) (655)
(Increase) Decrease in other current assets (371) 235 (473)
Increase (Decrease) in accounts payable and accrued expenses 885 (651) 253
Net change in other operating assets and liabilities 193 270 (86)
--------- --------- ----------
Net cash from operations 7,164 6,340 4,410
--------- --------- ----------
Cash Flows from (used in) Investing Activities:
Proceeds from sale of subsidiary's stock -- 424 --
Expenditures for property, equipment and leaseholds (12,866) (5,757) (8,985)
Proceeds from sale of property and equipment 8,479 -- --
Payments received on loan to ESOP 54 239 212
Other 31 (215) (423)
--------- --------- ----------
Net cash used in investing activities (4,302) (5,308) (9,196)
--------- --------- ----------
Cash Flows from (used in) Financing Activities:
Short-term borrowings (50) (135) 600
Issuance of long-term debt 11,401 5,755 15,182
Repayment of long-term debt (12,331) (4,956) (12,884)
Dividends to shareholders (1,220) (1,116) (1,002)
Issuance (Retirement) of common stock 333 655 (258)
--------- --------- ----------
Net cash (used in) from financing activities (1,867) 203 1,638
--------- --------- ----------
Net increase (decrease) in cash and equivalents 995 1,235 (3,148)
Cash and equivalents at beginning of year 3,513 2,278 5,426
-------- -------- --------
Cash and equivalents at end of year $ 4,508 $ 3,513 $ 2,278
======== ======== ========
Supplementary schedule of noncash investing and financing activities:
Assets received in lieu of payment of note receivable $ 465
Note receivable as partial payment for real property sold $ 650
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1: Description of Business and Significant Accounting Policies
--------------------------------------------------------------------------------
American Recreation Centers, Inc. and its subsidiaries (the Company) operate
bowling centers in California, Texas, Wisconsin, Kentucky, Missouri and
Oklahoma. The Company's non-California bowling centers are owned and operated by
three 85 percent owned partnerships, Triangle Bowl Associates, Mid-America
Associates and American Red Carpet. The accompanying financial statements
include the accounts of American Recreation Centers, Inc., its wholly and
majority-owned corporate subsidiaries and seven general partnerships in which
the Company has controlling financial interests.
Prior to the first quarter of 1996, the Company operated in two business
segments: bowling and direct marketing. As a result of the sale of the Company's
investment in The Right Start, Inc. (Right Start), which comprised the
operations of the direct marketing segment, the consolidated statement of income
has been retroactively restated to exclude the direct marketing segment from the
results of continuing operations. Significant data related to the former direct
marketing segment is disclosed in note 2.
Certain financial statement reclassifications of 1994 and 1993 amounts have been
made for comparative purposes.
A summary of the accounting principles and practices used in the preparation of
the consolidated financial statements follows.
Fiscal Year The Company's fiscal year is a fifty-two or fifty-three week period
ending on the last Wednesday in May. Fiscal year 1995 comprised 53 weeks. Fiscal
years 1994 and 1993 each comprised 52 weeks.
Earnings Per Share of Common Stock Earnings per share is computed on the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period. Average shares outstanding were 5,020,649,
4,940,461 and 4,889,226 in 1995, 1994 and 1993. Common stock equivalents include
the Company's stock options. Common stock equivalents in the aggregate are not
dilutive and, accordingly, are excluded from the computations of earnings per
share.
Cash and Equivalents Cash equivalents include certificates of deposit, money
market accounts, and demand deposits all of which have original maturities of
three months or less.
Inventories Inventories consists of products purchased for resale and are stated
at the lower of cost, determined on a first-in, first-out basis, or market
value.
Property, Equipment and Leaseholds Additions, major renewals and betterments are
included in the asset accounts a cost. Maintenance, repairs and minor renewals
are charged to operations when incurred. Generally, depreciation for financial
statement purposes is computed using the straight-line method over the estimated
useful life of the asset. Accelerated methods are used for income tax purposes.
The estimated lives of the assets for financial statement purposes are as
follows: building, 25-40 years; equipment, 3-25 years; leaseholds, and leasehold
improvements, 10 years or life of lease. The costs and related accumulated
depreciation of assets retired or otherwise disposed of are eliminated from the
accounts. Gains and losses from disposals are included in operations.
Property Held for Sale Property held for sale includes land and buildings
recorded at the lower of cost or estimated net realizable value.
Sale of Stock by Subsidiaries Upon the sale of stock by its corporate
subsidiaries, the Company has elected to reflect in its consolidated income
statement the difference between the book value of its interest in such
subsidiaries after the sale of stock, and the book value of its interest in such
subsidiaries prior to the sale of stock.
Income Taxes Effective May 27, 1993, the Company adopted FAS109 "Accounting for
Income Taxes" which requires an asset and liability approach under which
deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. Previously, the Company accounted for
income taxes in accordance with FAS96. Financial statements for prior years have
not been restated and the cumulative effect of the accounting change was not
material.
Financial Instruments The Company will adopt FAS107 "Disclosure of Fair Value
Instruments" in 1996. The effect of the adoption is not expected to have a
material impact on the financial statements.
<PAGE>
Note 2: Discontinued Operations and Subsequent Event
-------------------------------------------------------------------------------
On August 4, 1995, the Company sold its majority interest in The Right Start,
Inc, a catalog company and retailer of infants' and children's products, to an
investment group led by Kayne, Anderson Investment Management Inc. The purchase
price for the 3,937,000 shares was $11,811,000 cash plus an option to repurchase
400,000 shares of Right Start's common stock at exercise prices ranging from
$3.30 to $6.00 over a seven year period. In connection with the transaction, the
Company has agreed to reimburse Right Start up to $680,000 should it be unable
to sustain ordinary loss treatment for its deferred tax loss carryforward and it
have sufficient taxable income in or before its fiscal year 2000. The Company
will record an after-tax gain on the sale of approximately $2,300,000, in the
first quarter of 1996. This gain includes the Company's shares of Right Start's
results of operations in fiscal 1996 up to the date of sale which were not
significant.
As a result of the sale, the Company has reflected its investment in Right Start
prior to the sale in the consolidated balance sheet as net investment in
discontinued operations. The Company's share of Right Start's results of
operations is included in the consolidated statement of income as discontinued
operations. Prior period amounts have been restated for consistency. (Loss)
Income from operations of The Right Start, Inc. net of applicable income taxes
is summarized as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 45,741 $ 50,515 $ 38,253
--------- --------- ---------
Operating (loss) income (1,659) 224 1,410
Interest and other income and expense, net 43 54 253
Loss on sale of Children's Wear Digest (1,744) -- --
--------- --------- ---------
(Loss) Income from operations of The Right Start, Inc.
before income taxes and minority interest (3,360) 278 1,663
Income taxes 1,254 (102) (631)
Minority interest 790 (64) (377)
--------- --------- ---------
$ (1,316) $ 112 $ 655
========= ========= =========
</TABLE>
Note 3 Acquisitions and Dispositions and Sales of Subsidiary's Stock
--------------------------------------------------------------------------------
1995 During the first quarter of 1995, the Company's 90 percent owned
partnership sold its Budget Mini-Storage facility in Milpitas, California for
$3,600,000. Proceeds were used to retire long-term debt of $2,487,000 and to
acquire bowling centers in Milwaukee, Wisconsin (see below). A pre-tax,
pro-minority interest gain of $2,007,000 was recorded on the sale. The sale of
the Budget Mini-Storage and the acquisition of the Milwaukee centers was
accounted for as a like-kind exchange for income tax purposes.
In the second quarter, the Company formed the American Red Carpet joint venture
to acquire substantially all of the Red Carpet bowling chain in Milwaukee,
Wisconsin. The $800,000 purchase price included the land, building and equipment
of six bowling centers totaling 316 lanes. 1995 acquisitions also included the
purchase by Triangle Bowl Associates of a $700,000 building site in Addison,
Texas. At May 31, 1995, the Company had commenced construction on the site of a
family entertainment complex that includes 30 lanes of bowling and a wide
variety of other recreational attractions. Total cost of the project, including
the land, is expected to be $4,600,000.
In the third quarter of 1995, the Company sold the land and building housing its
60-lane bowling center in San Pablo, California for $2,500,000. Proceeds were
used to retire $1,768,000 in long-term debt. A pre-tax gain of $533,000 was
recognized on the sale which will be deferred for income tax purposes provided
the Company reinvests the proceeds from the sale in similar assets within three
years.
1994 During the first quarter of 1994, the Company sold 63,000 shares of The
Right Start, Inc.'s common stock for a pre-tax gain of $297,000. Cash proceeds
totaled $425,000. The sale reduced the Company's ownership in Right Start from
63.5 percent to 62.5 percent.
1994 acquisitions included the purchase by Triangle Bowl Associates of a 32-lane
bowling center in Midland, Texas for $600,000. The purchase included a ten year
lease on the land and building with a stated option price exercisable anytime
during the ten years. The purchase option for $1,000,000 was exercised during
the third quarter of 1995. Mid-America Associates acquired a 24-lane center in
Kansas City, Missouri and two 40-lane centers in Oklahoma City, Oklahoma. The
total purchase price for all three centers, which included land and buildings,
was approximately $3,400,000.
During the forth quarter of 1994, a $398,000 pre-tax charge was recorded in
anticipation of the pending sale of a real estate investment in Oakland,
California. The sale was completed during the second quarter of 1995.
Subsequent to year-end, the Company repossessed the operating assets of a
36-lane bowling center in Fresno, California in lieu of payment on a note
receivable and assumed the center's lease. A loss of $111,000 reflecting the
excess of the note balance over the fair market value of the assets received was
recorded in 1994.
1993 During 1993, the Company formed the Mid-America Associates joint venture
which acquired a 24-lane center in Kentucky and a 24-lane center in Oklahoma.
Total cost for land, building and equipment of these centers totaled
approximately $1,600,000. Triangle Bowl Associates completed the construction of
a 48-lane bowling center in Arlington, Texas for a total cost, including land
and building of approximately $3,500,000. The California bowling division
reacquired the operations of a 40-lane center in Redwood City, California for
$172,000. The center, which is in a building owned by the Company, is on land
that is under a long-term lease. That division also acquired the operations of a
42-lane center in Vallejo, California for $912,000 and entered into a long-term
lease for the building.
<PAGE>
1993 acquisitions also included the purchase of the stock of Just Games, Inc.,
which owned and operated video and amusement games in Company bowling centers as
well as many non-bowling amusement locations. During May 1993, the Company sold
the stock of Just Games, Inc. back to the original owner, retaining only the
bowling center portion of the business in its wholly-owned subsidiary, ARC
Games, Inc. The sale to the original owner was at approximately book value.
During the fourth quarter of 1993, a real estate investment in Oakland,
California was sold at a pre-tax loss of $296,000.
Note 4: Notes Receivable
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
May 31, May 25,
Dollars in thousands 1995 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured notes receivable payable in monthly installments through 2003 with
weighted average interest rates of 9% and 10% $ 1,897 $ 1,341
Secured notes receivable from TBA minority partner, interest payable annually,
due 1995 through 1999, with weighted average interest rates of 10% and 9% 511 423
-------- --------
2,408 1,764
Less--Amounts due within one year 141 133
-------- --------
$ 2,267 $ 1,631
======== ========
</TABLE>
Note 5: Long-Term Debt and Lease Commitments
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
May 31, May 25,
Dollars in thousands 1995 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Secured notes payable in monthly installments with weighted average
interest rates of 9% and 10% $ 29,554 $ 29,319
Other 831 1,996
-------- --------
30,385 31,315
Less--Amounts due within one year 1,638 2,190
-------- --------
$ 28,747 $ 29,125
======== ========
</TABLE>
Notes payable and installment contracts are secured by real property and
equipment with a cost of $46,134,000 and assignment of rents under real property
leases. Installment contracts, which bear interest at annual rates varying from
9% to 10%, are payable in fixed monthly amounts.
Maturities of long-term indebtedness at May 31, 1995, excluding capital lease
obligations, during the next five years are: 1996-$1,409,000; 1997-$4,875,000;
1998-$5,702,000; 1999-$2,333,000; 2000-$4,934,000.
At May 31, 1995, the Company has $10,211,000 available under an unused bank
commitment. Proceeds from the unused commitment can be used to acquire,
construct or refurbish bowling centers or to acquire other compatible
recreational businesses. Advances would bear interest at the prime rate plus
.75%. American Red Carpet has $2,743,000 available under an unused bank
commitment that can be used for the acquisition of bowling centers. Advances
would bear interest at the prime rate plus 1%.
The Company also maintains a secured line-of-credit arrangement with a bank
whereby the Company may borrow up to $2,000,000 for short-term cash needs.
Interest is payable on the outstanding balance at a rate of .5% over the bank's
prime rate. The line-of-credit requires a 30 day out-of-debt period each fiscal
year. At May 31, 1995 and May 25, 1994 there were no borrowings outstanding
under the line-of-credit.
The Company's wholly-owned subsidiary, ARC Games, Inc., maintains a $1,000,000
unsecured bank line-of-credit. Advances bear interest at the bank's prime rate
plus 1%. $415,000 and $465,000 was outstanding under the lines as of May 31,
1995 and May 25, 1994. The line-of-credit agreement requires that the Company
maintain a $250,000 interest bearing minimum balance with the bank.
Of the thirty-nine bowling centers operated by the Company at May 31, 1995,
thirteen are leased under noncancelable agreements expiring from 1999 through
2009. The other bowling centers are owned by the Company or leased from
partnerships in which the Company owns majority interests. The Company's minimum
rental commitments under noncancelable operating leases at May 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Operating
Dollars in thousands Leases
-------------------------------------------------------------------------------
<S> <C>
1996 $ 1,541
1997 1,551
1998 1,566
1999 1,500
2000 1,201
2001 and after 4,652
--------
$ 12,011
========
</TABLE>
<PAGE>
The leases provide for minimum and percentage rentals and in the majority of
cases for the payment of property taxes and insurance by the lessee. Rental
expense under operating leases, including property taxes of $270,000, $239,000
and $216,000 was $1,845,000, $2,064,000 and $1,906,000 in 1995, 1994 and 1993.
Included in the rental expense above are additional rents of $270,000, $317,000
and $404,000 based on sales volume above minimums. The Company is also
contingently liable for rent payments on certain leases assigned to third
parties in the event of nonpayment by the assignees.
Note 6: Common Stock Activity and Stock Options
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Changes in common stock were as follows:
Dollars in thousands Shares Issued Amount
--------------------------------------------------------------------------------
<S> <C> <C>
Balance, May 27, 1992 4,923,588 $ 12,043
Issued 34,500 172
Repurchase of stock (71,797) (430)
--------- ---------
Balance, May 26, 1993 4,886,291 11,785
Issued 117,262 655
--------- ---------
Balance, May 25, 1994 5,003,553 12,440
Issued 50,706 333
--------- ---------
Balance, May 31, 1995 5,054,259 $ 12,773
========= =========
</TABLE>
The Company has an employee stock ownership plan (ESOF) and an employee stock
purchase plan (ESPP) for the benefit of its eligible employees as defined in the
plans. The ESOP is funded exclusively by employer contributions made at the
discretion of the Board of Directors. Contributions to the ESOP totalled
$425,000 in each of 1995, 1994 and 1993. The ESOP hold 686,479 and 737,464
shares of the Company's common stock at May 31, 1995 and May 25, 1994. All of
the shares were allocated to the benefit of plan participants. Under the ESPP
plan, employees' contributions are matched by the Company at a rate of fifty
percent. Employer contributions to the ESPP totaled $73,000, $84,000 and
$100,000 in 1995, 1994 and 1993.
In accordance with the 1988 Key Employee Incentive Stock Option Plan, as amended
(Employee Plan), options to purchase 850,000 common shares of the Company can be
issued to key employees. Under the 1988 Stock Option Plan for Non-Employee
Directors, as amended (Directors' Plan), options to purchase 150,000 common
shares of the Company can be issued to non-employee directors for services to
the Company.
Under both plans, options are required to be granted at the fair market value of
the stock at the date of grant. Options may be granted until September 30, 1998.
Participants are generally required to exercise their options within five years
of vesting or within sixty days of termination. Under the Employee Plan, options
granted generally can vest up to five years (or less at the discretion of the
Board of Directors). Under the Directors' Plan, directors automatically receive
a grant of 5,000 options three months after becoming a director and 2,500
options for each of the next four years to a maximum of 15,000 options. Such
options are vested at the date of grant.
At May 31, 1995, 330,383 and 75,000 options were available for grant under the
Employee and Directors' Plans, respectively. Transactions for stock options are
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year 651,450 565,901 607,850
Granted 12,500 197,900 17,500
Exercised (21,000) (60,000) (34,500)
Cancelled (48,333) (52,351) (24,949)
----------- ------------ ------------
Balance at end of year 594,617 651,450 565,901
----------- ------------ ------------
Exercisable at end of year 488,183 417,700 450,533
----------- ------------ ------------
Range of exercise price at end of year $5.00-$8.75 $5.00-$8.75 $5.00-$8.75
----------- ------------ ------------
Grant prices $6.25 $6.00-$6.375 $5.875-$6.63
----------- ------------ ------------
</TABLE>
<PAGE>
Note 7: Income Taxes
--------------------------------------------------------------------------------
The Company files a consolidated federal income tax return which includes the
results of operations of its partnerships and corporate subsidiaries, with the
exception of Right Start which filed a separate federal return. Tax payments in
1995, 1994 and 1993 were $72,000, $113,000 and $459,000.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Dollars in thousands 1995 1994 1993
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (383) $ (274) $ 296
State 36 20 135
------- ------- -------
(347) (254) 431
------- ------- -------
Deferred:
Federal 1,899 1,110 114
State 315 246 138
------- ------- -------
2,214 1,356 252
------- ------- -------
Total provision $ 1,867 $ 1,102 $ 683
======= ======= =======
</TABLE>
The effective income tax rates on pre-tax earnings from continuing operations
are 39% in 1995, 38% in 1994, and 37% in 1993. The following table details the
major differences between the effective tax rates and the statutory federal
income tax rate of 34%.
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 34% 34% 34%
Increase (Decrease) in tax rate resulting from:
State income taxes,net of federal tax benefits 5 6 9
Dividends on ESOP shares -- (2) (4)
Other -- -- (2)
------- ------- -------
39% 38% 37%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
May 31, May 25,
Deferred tax liabilities (assets) are comprised of the following (in thousands): 1995 1994
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 5,258 $ 4,550
Gain on sale of stock by subsidiary 2,991 2,874
Real property transactions 2,026 1,982
Other 171 166
------- -------
Gross deferred tax liabilities 10,446 9,572
------- -------
Oakland real estate -- (1,491)
State taxes (442) (335)
Other (129) (179)
Gross deferred tax assets (571) (2,005)
------- -------
Net deferred tax liability $ 9,875 $ 7,567
======= =======
</TABLE>
Tax benefits of $13,000 in 1995 and $43,000 in 1994 resulting from employees'
exercise of stock options have been credited directly to equity as required by
FAS109. At May 31, 1995, the Company has a net operating loss carry-forward
which can be used to offset future income. This carry-forward will generate a
future tax benefit of $104,000.
Note 8 Litigation and Contingencies
--------------------------------------------------------------------------------
The Company is a party to legal actions arising in the ordinary course of its
business. Management and the Company's legal counsel are of the opinion that
none of these legal actions will have a significant adverse effect on the
Company's financial position.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of American Recreation Centers, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and retained earnings and of cash flows
appearing on pages 6 through 13 of this report present fairly, in all material
respects, the financial position of American Recreation Centers, Inc. and its
subsidiaries at May 31, 1995 and May 25, 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Sacramento, California
August 4, 1995
<PAGE>
Board of Directors
Robert Feuchter
Chairman of the Board
Robert A. Crist
President and Chief Executive Officer
G. Gervaise Davis III
Founding Principal, Davis & Schroeder, P.C.,
Attorney and Legal Counsel for the Company
Stephen R. Chanecka
President, Informed Investors, Inc.
Sacramento, California
Stewart Bloom
Partner, Wershow & Bloom
Los Angeles, California
Stanley B. Schneider
Partner, Gursey, Schneider & Co.
Los Angeles, California
David C. Hardie
Chairman and Chief Executive Officer
Hallador and Hallador Venture Partners
Sacramento, California
Officers
Robert A. Crist
President and Chief Executive Officer
Karen B. Wagner
Vice President/Treasurer and Assistant Secretary
Susan K. Cook
Vice President/General Manager
California Bowling Division
G. Gervaise Davis III
Vice President/Legal and Secretary
Corporate Information
Corporate Address
American Recreation Centers, Inc.
11171 Sun Center Dr., Suite 120
Rancho Cordova, CA 95670
P.O. Box 580
Rancho Cordova, CA 95741
Telephone: (916) 852-8005
Fax: (916) 852-8004
Transfer Agent and Registrar
First Interstate Bank, Ltd.
San Francisco, California
Independent Accountants
Price Waterhouse LLP
Sacramento, California
Legal Counsel
Davis & Schoeder, P.C.
Monterey, California
Securities Counsel
Stradling, Yocca, Carlson & Rauth
Newport Beach, California
SEC Form 10-K
A copy of American Recreation Centers, Inc.'s
Form 10-K report filed with the Securities and
Exchange Commission is available upon request
without charge by writing to the Company,
attention Karen B. Wagner,
Vice President/Treasurer
Annual Meeting
The annual meeting will be held on
September 26, 1995 at 10:00 a.m. at the
Company's Corporate Headquarters:
11171 Sun Center Drive, Suite 120
Rancho Cordova, California
<PAGE>
Company Locations
<TABLE>
<S> <C> <C> <C>
Bowling Centers Saratoga Lanes Forest Lanes Oklahoma
(32 lanes) (40 lanes)
Sacramento/ 1585 Saratoga Avenue 22771 Centre Drive Moore Bowl
San Joaquin Valley San Jose, California Lake Forest, California (40 lanes)
(408) 252-2212 (714) 770-0055 420 South West 6th Street
Mardi Gras Lanes Moore, Oklahoma
(50 lanes) Mission Lanes Texas (405) 799-3344
4800 Madison Avenue (40 lanes)
Sacramento, California 1287 South Park Victoria North Shepherd Lanes Sunny Lanes
(916) 332-7150 Milpitas, California (28 lanes) (24 lanes)
(408) 262-6950 650 West Crosstimbers 4330 South East 15th Street
Alpine Valley Bowl Houston, Texas Del City, Oklahoma
(40 lanes) San Francisco (713) 695-6454 (405) 677-6616
2326 Florin Road Bay Area
Sacramento, California Triangle - Lewisville Windsor Lanes
(916) 428-7723 Mel's Southshore Bowl (32 lanes) (40 lanes)
(40 lanes) 1398 West Main Street 4600 North West 23rd Street
Birdcage Bowl 300 Park Street Lewisville, Texas Oklahoma City, Oklahoma
(40 lanes) Alameda, California (214) 436-6576 (405) 942-5545
6149 Sunrise Boulevard (510) 523-6767
Citrus Heights, California Triangle - Irving Missouri
(916) 726-3366 Mowry Lanes (48 lanes)
(40 lanes) 1717 North Belt Line Road Capital Lanes
Land Park Bowl 585 Mowry Avenue Irving, Texas (24 lanes)
(32 lanes) Fremont, California (214) 790-8201 11611 Hickman Mill Road
5850 Freeport Boulevard (510) 794-7777 Kansas City, Missouri
Sacramento, California Triangle - Richardson (816) 761-8111
(916) 421-3671 Pinole Valley Lanes (40 lanes)
(40 lanes) 2101 North Central Expressway Wisconsin
Rocklin Bowl 1580 Pinole Valley Road Richardson, Texas
(40 lanes) Pinole, California (214) 231-2695 Bowlero Bowl
2325 Sierra Meadows Drive (510) 724-9130 (72 lanes)
Rocklin, California Triangle - DeSoto 11737 West Burleigh
(916) 624-8216 Valle Vista Bowl (40 lanes) Wauwatosa, Wisconsin
(42 lanes) 121 Northgate Drive (414) 258-9000
Rodeo Lanes 3345 Sanorra Boulevard DeSoto, Texas
(40 lanes) Vallejo, California (214) 780-8090 West Allis Bowl
140 Shaw Avenue (707) 553-2200 (48 lanes)
Clovis, California Triangle - Arlington 10901 West Lapham
(209) 298-6555 Mel's Redwood Bowl (48 lanes) West Allis, Wisconsin
(40 lanes) 1801 East Lamar Boulevard (414) 476-9100
Sunnyside Lanes 2580 El Camino Road Arlington, Texas
(36 lanes) Redwood City, California (817) 276-9898 West Bowl
5693 East Kings Canyon Road (415) 369-5584 (48 lanes)
Fresno, California Triangle - Midland Park Lanes 7505 West Oklahoma
(209) 251-7133 19th Avenue Bowl (32 lanes) Milwaukee, Wisconsin
(32 lanes) 5320 West Loop 250 North (414) 321-5050
Visalla Lanes 1830 South Delaware Midland, Texas
(40 lanes) San Matco, California (915) 689-9725 South Park Bowl
1740 West Caldwell Avenue (415) 341-5813 (40 lanes)
Visalla, California Fun Fest* 305 North Chicago
(209) 625-2100 Southern California (30 lanes) South Milwaukee, Wisconsin
3805 Beldine Road (414) 762-9500
San Jose Cerritos Lanes Addison, Texas
(40 lanes) (214) 620-7700 Waukesha Bowl
Oakridge Lanes* 18811 Carmenita Road (48 lanes)
(50 lanes) Cerritos, California Kentucky 901 Northview Road
5420 Thornwood Drive (310) 924-9363 Waukesha, Wisconsin
San Jose, California Bowlodrome (414) 544-9600
(408) 578-8500 Friendly Hills Lanes (24 lanes)
(32 lanes) 600 East 14th Street Regency Lanes
Fiesta Lanes 15545 East Whittier Boulevard Owensboro, Kentucky (60 lanes)
(40 lanes) Whittier, California (502) 684-5297 6014 North 76th Street
1523 West San Carlos (310) 947-3815 Milwaukee, Wisconsin
San Jose, California (414) 464-8800
(408) 294-2810
</TABLE>
* Family Entertainment
Center Concepts
<PAGE>
ARC
AMERICAN
RECREATION
CENTERS, INC
<PAGE>
. 1995 ANNUAL REPORT .
American Recreation Centers, Inc. . 11171 Sun Center Drive, Suite 120 . Rancho
Cordova, California 95670
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOFRMATION EXTRACTED FROM FISCAL 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-31-1995 MAY-25-1994
<PERIOD-START> MAY-26-1994 MAY-27-1993
<PERIOD-END> MAY-31-1995 MAY-25-1994
<CASH> 4,508 3,513
<SECURITIES> 0 0
<RECEIVABLES> 274 454
<ALLOWANCES> 16 96
<INVENTORY> 510 391
<CURRENT-ASSETS> 13,485 13,496
<PP&E> 83,481 75,681
<DEPRECIATION> 26,018 24,056
<TOTAL-ASSETS> 76,925 73,439
<CURRENT-LIABILITIES> 9,542 9,325
<BONDS> 0 0
<COMMON> 12,773 12,440
0 0
0 0
<OTHER-SE> 16,898 16,440
<TOTAL-LIABILITY-AND-EQUITY> 76,925 73,439
<SALES> 45,694 41,196
<TOTAL-REVENUES> 45,694 41,196
<CGS> 4,540 3,890
<TOTAL-COSTS> 40,181 35,312
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,984 2,759
<INCOME-PRETAX> 4,794 2,879
<INCOME-TAX> 1,867 1,102
<INCOME-CONTINUING> 2,927 1,777
<DISCONTINUED> (1,316) 112
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,611 1,889
<EPS-PRIMARY> .32 .38
<EPS-DILUTED> .32 .38
</TABLE>
